What does the term annual percentage rate mean for a loan?

Answer 1

Annual percentage rate, commonly referred to as APR, is what creditors charge consumers in order to allow them to make installment payments on rather large purchases, such as cars and homes. Loan types, credit score, report, and history, can all have effects on what APR you can get for a loan. The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the note rate. APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan. APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It is supposed to create a level playing field for lender by preventing them from advertising a low rate by hiding fees. Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR does not necessarily translate to a better rate. The following fees ARE generally included in the APR: * Points - both discount points and origination points * Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30! * Loan-processing fee * Underwriting fee * Document-preparation fee * Private mortgage-insurance The following fees are SOMETIMES included in the APR: * Loan-application fee * Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death) The following fees are normally NOT included in the APR: * Title or abstract fee * Escrow fee * Attorney fee * Notary fee * Document preparation (charged by the closing agent) * Home-inspection fees * Recording fee * Transfer taxes * Credit report * Appraisal fee Calculating APR on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APR. Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time. Finally, many lenders do not even know what they include in their APR because they compute it using a software program. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APR values! Yup - clear as mud.