Truths And Myths About APR’s

The Initials APR stand for Annual Percentage Rate, but it must not be taken as literally as it should seem. It is “annual” it contains a “percentage rate”, but it is not only an interest rate charged per annum. Many borrowers have been misled by their initial judgement of the APR, believing that it is the only factor to consider, when shopping for a loan.What It Really ContainsThe APR is generally found advertised next to the interest rate affecting the capital that is lent. It is a similar number, but it does not affect the monthly payments. We could define the APR as a compound number that includes the interest rate plus some other fees, and not all lenders include the same ones in their APR.ObligationThe “Federal Truth in Lending” law requires all lenders to inform their APR when advertising a rate. This explains why the judgment of the APR alone misleads prospective borrowers. The APR can vary from lender to lender because each one includes different fees in their particular APR.Which Fees Are Included?First off, there is the loan-processing fee, which could be considered an administrative cost. Next, is the underwriting fee, which is the cost of risk assessment of a particular borrower and his/her conditions and the calculation of suitable terms for the loan. Also, the document preparation fee is included, as well as the mortgage insurance.Some lenders also include the application fee and a life insurance to care for the payments in the event of the borrower’s death. So, as we can see, there are several extra condiments that affect the interest rate, to finally arrive at a determined APR.ConfusionMany lenders are actually confused and do not really know the items included in their APR. This is due to the fact that the APR’s are calculated by a software program. Also, depending on the program used, they have one number or another. The real cause of this confusion is that the APR is not clearly defined.Do Not Judge A LoanA loan can not be initially judged on the APR alone, especially if you are comparing two loans of different periods. A 20 year loan could have a lower interest rate than a 30 year loan, but have a higher APR, since the fees included in the APR are spread over a shorter period.A Proper EvaluationA correct evaluation of your loan should be made upon the knowledge of the interest rate, plus APR as well as the fees included AND the fees not included. It may sound redundant to ask what is and what is not included, but it is the only way to be well informed and to make a cross-check, to evaluate the transparency of this lender in particular.FinallyTake note of all this information and make a chart to be able to compare the different lenders. Only when you are sure which one you want, is it advisable to apply for a loan. More than two applications could affect your credit report, since each one filed is included in the report. The third application will have the record of the two previous ones and give a bad image of you to the lender.As a closing, let me tell you that it is not a matter of “fearing” the APR or its implications, just the proper care to know things in advance. A good preparation means the difference between a good deal and a bad one.