Video:What Is APR?
with Omar SaadWant to learn about APR and what it stands for? Here, see helpful information about the annual percentage rate before you take out a loan.
Transcript:What Is APR?
Hi I'm Omar Saad here for About.com and today we're going to take a look at what APR is, using an article from About.com's Banking and Loans site. As we all know, anytime we take out a loan or purchase something on credit, we end up paying a premium for that privilege. That premium, of course, is called interest. What many people don't understand, however, is that the APR on the money that they are borrowing may include more than just the interest cost of the loan. Let's take a closer look.Meaning of APR
APR stands for annual percentage rate and is perhaps best defined as the annual cost of borrowing money. While the interest rate on a mortgage might be 5% the APR of that loan may be significantly higher. This is because the APR includes the full cost of the money borrowed, which in the case of a mortgage loan could include, mortgage insurance, discount points, and processing fees, among other things. Lenders have long been able to package loans and credit in a way to make it look appealing to the borrower while concealing the true cost.More Facts About APRs
For example a low interest rate on a loan or credit card may look great but you must consider how much you had to pay to receive that rate, in the case of a mortgage, or what your annual fee is, in the case of a credit card. The inherent potential for exploiting this confusion is why congress passed the Truth in Lending Act in 1968, requiring lenders to disclose the APR to borrowers.To analyze the APR versus interest rate comparison more closely, lets take a look at an example from About.com's Banking and Loans site. Assume you will borrow $100,000, at an interest rate of 7%. Lets say that you also have $1,000 in closing costs. Plugging these numbers into About.com's online APR calculator we find that the APR comes out to 7.1%. That's higher than the interest rate of 7%.Last Note About APRs
Borrowing money, while temping, should never be entered into lightly. To that end, before doing so you should understand exactly how much you are paying for the privilege. Otherwise your pocket book could be in for a nasty surprise down line.Thanks for watching and to learn more visit us on the web at About.com.