Annual Percentage Rate (APR) is an expression of the effective interest rate that will be paid on a loan, taking into account one-time fees and standardizing the way the rate is expressed. The aim of using APR is to calculate a total cost of borrowing. APR is intended to make it easier to compare lenders and loan options.

***IMPORTANT – The value of understanding APR is quickly realized when you understand that it is the true cost of your money. Many online lenders and brokers try to make their loans appear less expensive by manipulating labels. For example “NO LENDER FEES”. While that may be true, the DISCOUNT POINTS they charge are astronomical, making the loans very expensive when compared to INLOAN. The good news is that Federal Law requires all lenders to accurately disclose the APR. The closer the APR is to the NOTE RATE the lower is the true cost of your loan. At INLOAN, our APRs beat out our competitors’ APRs on a consistant basis every day!

The APR is likely to differ from the "note rate" or "headline rate" advertised by the lender.
While there are several acceptable ways to calculate the exact APR, the general process is:

• Total the included one-time costs, INCLUDING POINTS, and add them to the face amount on the loan.
• Calculate a monthly payment for that amount at the loan's "note rate".
• Calculate what interest rate would have to be applied to just the face amount of the loan in order to equal the calculated monthly payment in previous step.

In a simplified example, if you borrow $100 for one year at 5% interest (so that you will owe $105 at the end of the year) and you pay the lender a $5 origination fee, your total cost to borrow the money will be $10 ($5 in a year for interest plus $5 now for the origination fee). Your APR will come out at just over 10%.

Federal Law requires that lenders disclose the APR before the loan (or credit application) is finalized. APR is a term used with regards to deposit accounts as well.

APR is dependent on the loan period

APR is dependent on the time period for which the loan is calculated. That is, the APR for one loan with a 30 year duration loan cannot be compared to the APR for another loan with a 20 year loan duration. APR can be used to show the relative impact of different payment schedules (such as balloon payments or bi-weekly payments instead of straight monthly payments), but most standard APR calculators have difficulty with those calculations.

Furthermore, most APR calculators assume that an individual will keep a particular loan until it is completely paid off resulting in the up-front fixed closing costs being amortized over the full term of the loan. If the consumer pays the loan off early, the effective interest rate achieved will be significantly higher than the APR initially calculated. This is especially problematic for mortgage loans where typical loan durations are 15 or 30 years but where many borrowers move or refinance before the loan period runs out.

In theory, this factor should should not affect any individual consumer's ability to compare the APR of the same product (same duration loan) across vendors. ARP may not, however, be particularly helpful when attempting to compare different products.