Calculating Annual Percentage Rate
Annual Percentage Rate, also known as
APR, is a widespread term in the sphere of
debt
related topics. However, most people in
debt
know very little about the terms like Annual Percentage Rate and Interest Rate, whereas APR has a crucial part in the process of
debt consolidation
. In this review, we will focus on important aspect of APR in the terms of
debt consolidation
.
Here are some basic definitions of the APR:
1. APR is a measure of the credit cost, expressed as a nominal yearly rate.
2. APR is the equivalent interest rate (considering all additional costs) charged on a certain
loan
amount. It is a function of the
loan
amount, interest rate, total additional cost, and the
loan
term.
So, basically: APR = Interest rate + Extra cost.
Components of the APR: different lenders have different fees they include in the APR. Mostly, the fees in the APR comprise fees charged due to the making of the
loan
, tax service fees, attorney fee, escrow fee, title fee, home inspection fee, recording fee, credit report fee. The
loan
making fees include such aspects as:
loan
processing, underwriting, document preparation, private mortgage insurance,
loan
application, credit life insurance and appraisal fees.
Why do you need to know about APR? Because unfortunately, many lenders lie to their customers about fees they charge. And that’s when the APR can help to compare the actual cost of different
loans
, and get to know if the lender includes any hidden fees. So, before opting for any
loan
you should first check the APR of that particular
loan
in order to understand fully the fees and charges added to the
loan
amount, and the amount you will have to pay back.
How does the APR differ from the interest rate? The APR comprises both the normal interest rate and extra costs. The extra cost can be different with various lenders, so depending on them varies the APR. In case there are no extra fees charged, the amount of interest rates will be equal to that of the APR.
Is there any legal support to protect borrowers from the illegal practices of lenders? Yes, the FDIC created the Truth in Lending Law in 1968. Regulation Z. Part 226, under Truth in lending Act came into effect from July1, 1969. This section defines the Annual Percentage Rate (APR). According to this law, a creditor is obliged to inform a borrower about the APR within three days of receipt of
loan
application. The creditor is forbidden to hide the extra costs and is liable to show all the costs along with the interest rate to the borrower before signing any contract.
APR is very helpful in protecting borrowers against the creditors’ unfair practices. In case you are considering
debt consolidation
, APR is the adequate marker for the reliable or doubtful
debt consolidation
agency.