The Annual Percentage Rate (APR) represents the yearly cost of borrowing money, expressed as a percentage. It includes the interest rate plus any additional fees or costs associated with the loan, such as origination fees, closing costs, or mortgage insurance. APR provides a standardized way to compare the true cost of different loan offers. The Truth in Lending Act (TILA) requires lenders to disclose the APR to borrowers before they sign any loan agreement.
APR (Annual Percentage Rate)
Definition
The Annual Percentage Rate (APR) represents the yearly cost of borrowing money, expressed as a percentage. It includes the interest rate plus any additional fees or costs associated with the loan, such as origination fees, closing costs, or mortgage insurance. APR provides a standardized way to compare the true cost of different loan offers. The Truth in Lending Act (TILA) requires lenders to disclose the APR to borrowers before they sign any loan agreement.
Example
You receive two mortgage offers: Lender A offers 6.5% interest with $3,000 in fees (APR: 6.72%), and Lender B offers 6.75% interest with $1,000 in fees (APR: 6.82%). Despite Lender B having a higher interest rate, Lender A has a higher APR because of the larger fees, making Lender B slightly cheaper overall.
Key Points
- 1Includes both the interest rate and associated fees
- 2Legally required to be disclosed by lenders under TILA
- 3Higher than the stated interest rate when fees are included
- 4Use APR to compare loan offers; use APY to compare savings accounts