APR Explained

Annual Percentage Rate (APR) is the interest rate that is applied for the whole year on your borrowings. It could be a simple interest calculated annually (nominal APR) or could be worked out on the basis of calculating the compound interest annually (effective APR).  This could be calculated on a loan taken to buy a property, a house, or even for paying off credit card debt.In actuality, the APR is an indicator of how much you have to pay on the credit agreement that you have signed.  This includes any added cost incurred on taking the loan like processing fees, points, application fee, closing cost, private mortgage insurance or any other charges added by the lender.  All these additions will be deducted before you actually get the loan so you never get to see all of the money you borrowed, though your repayment schedule will definitely be calculated including all these extra costs. Evaluate all the costs of your loan and if you feel these are not justified, go to another lender.The APR is different from a ‘good faith estimate’ as the latter is only an estimate of the different types of charges on the loan. The charges are because of broker fees, bank (lender) fees, origination fees; Insurance, escrows, taxes attracted on the transaction, third party inspection, attorney fees on closing, title fees, etc.  Each category of fees should be examined carefully. Sometimes, lenders offer lower interest rates but have high fees. Brokers factor in charges for preparing the document and administrative fees. However, a good broker who gives you a cross section of lender firms with their rates is an asset, even though he may be getting a commission on every customer he brings to the firm. Through negotiations, it is possible to reduce the charges in certain sections. Watch out for slick mortgage professionals and their wily explanations for certain charges. Standardization of charges on loans is subject to varied explanations and no two-lender firms agree on the rates.  There are a number of online calculators for arriving at the Annual Percentage Rate. Taking into account the total money borrowed, total extra cost, the interest rate, and the term (period of borrowing), there are different methods of calculating the APR. All arrive at different rates with marginal differences. In addition, factors like early repayment of the loan before the stipulated period can affect the APR. In such a case, the consumer will have to pay a higher interest rate than what was initially calculated. The APR for a ten-year loan repayment will differ from the repayment schedule of a fifteen-year loan period. The APR should reduce over the years as the loan amount keeps reducing on repayment.  However, in reality, since the repayment of the principal amount starts later and not during the interest only repayment period, the APR remains high. Credit card companies must notify customers on how their annual charges are computed. By indicating that one percent charges apply, credit card companies do not clarify that it is one percent every month and that the annual charges would work out to twelve percent. For more information on APR, go to http://annettapowellblog.com/.   See you there!Yours Sincerely, Annetta PowellYour Professional Success Coach