Understanding APR

A loan from a bank or other financial institution may be just the thing to help you out at certain times. When you find that you’re temporarily short of cash due to special circumstances like holiday plans, unexpected expenses or a specific purchase which you need to make, a loan will relieve the pressure on your bank account. But, as with any important financial transaction, make sure you know what you’re getting into. Understand all the terms and conditions that are being offered by any potential lender before you sign their loan application form. One of the most crucial of these is the APR.

What Does APR Mean?
APR, or Annual Percentage Rate, is the total annual rate that you will be charged for borrowing. It is based on the current US Prime Rate plus the bank’s margin. The APR clarifies the yearly rate of interest. For example if you take out a loan at 2 percent interest per month, the APR will be 2 percent x 12 months, or a rate of 24 percent per year. In some cases, the APR is structured to include charges such as transaction initiation fees or late penalties. In US law, the Truth in Lending Act regulates the way in which a lender must calculate and disclose the Annual Percentage Rate on a particular loan.

What Are the Requirements for APR Disclosure?
Lending institutions such as banks and credit card companies are required to disclose the annual rate of interest on loans and credit card debt before you sign an agreement with them. This applies to both open-end credit (for instance credit card debt, home equity loan) and closed-end credit (mortgage, automobile purchase loan, etc.).

In the case of a home mortgage, the lender is required to disclose the APR to you within three working days from the time that you make your application. You are further protected by the Mortgage Disclosure Improvement Act (MDIA), which came into effect in 2009; if the final APR varies by more than 1/8 of a percent from the original Good Faith Estimate, the lender must disclose the revised amount and allow you another three days before the transaction is completed.

How Does Understanding the APR Help You?
When you take out a loan, it is essential to know exactly how much you will end up repaying. This will allow you to budget for loan payment, interest, and any additional charges as part of your household expenses. Equally vital, understanding the APR will permit you, as an informed consumer, to comparison shop for your loan.

You will have a clear numerical basis for comparison, so that you will know which lender offers you the best deal.