Video:What Are the Pitfalls of APR?

Transcript:What Are the Pitfalls of APR?

Hi, I'm Kaytie Sproul, here for About.com, and today we're going talk about some of the pitfalls associated with APR, using information from About.com's Banking and Loans site.

Information About the Pitfalls of APRs

When considering a loan and trying to decide which one will work best for you, the common thought is to choose the one with the lowest APR. However, there are other variables to consider. Let's take a closer look. We often assume that an APR includes all fees associated with a loan. While in some instances it does, it is possible that fees can be snuck past the APR umbrella. Lenders are given a bit of wiggle room when it comes to what they include in the APR calculation, so if you're working with one who isn't particularly forthcoming, you could get a nasty surprise. Specifically, credit report fees, appraisal fees, and home inspection fees all may not be included within an APR quote.

More Information About the Pitfalls of APRs

If you get a lower APR from one lender, be sure to ask if it includes those fees. The best loan for you depends upon the specifics of your situation. For example, the benefits of a low APR are tied to the assumption that the loan will be paid off over the length of its term. This is partially because lower APRs tend to feature some larger up-front fees, which aren't a big deal if they can be spread out over length of the loan. However, if you intend on paying off your loan well before the term is up, you won't be able to spread those initial costs out, and therefore would end up paying more for the lower APR loan.

More Notes About the Pitfalls fo APRs

Another thing to keep in mind when shopping for loans, is that the APRs lenders advertise are only for the most qualified of borrowers. So while that low APR may lure you in the door, unless you possess a high credit score and a stellar previous borrowing history, you likely won't qualify for the APR you saw in the ad. And don't forget, as already mentioned, the advertised APR might not include other fees, such as mortgage insurance. When shopping for a loan there are a number of things to consider including your current situation, where you expect to be in the future, and everything in between. APR is an excellent tool in helping determine which is the right loan for you, just be aware that it's simply one tool of several you'll need to apply in your search.

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