The Annual Percentage Rate, or APR, is related to mortgages, loans, and credit cards. Basically, it is the interest rate plus any other fees the lender charges. For example, the APR on a loan may be 6 percent. However, that loan’s interest rate is only 5.5 percent. The lender came up with an APR .5 percent higher because of the fees and charges that you pay. Since you probably pay these charges up front, the monthly payment is based on the 5.5 percent.
Credit cards and other revolving lines of credit work a little bit differently in regards to APR. For these loans, APR usually does not include fees but just the compound interest rate, which is charged over and over on a regular basis (monthly, daily, etc.). This is due to the fact that credit cards are revolving lines of credit. That means as soon as you repay the amount that you have charged on the card, that amount is then available to you to borrow again.
When applying for a loan, the law requires the lender to disclose to you both the APR and the interest rate. This is to protect you. It prevents the lender from getting you to sign on to a loan with a great interest rate, but then surprising you with lots of fees and charges. The fees and charges have to be disclosed up front with the interest rate.
It is important to look at the costs of all of the actual fees that the lender charges. Different lenders can offer the same interest rate but have different fees. Look closely at the total package to ensure that you get the best deal. The lender will provide you with a truth-in-lending disclosure before the loan is made. This tells you the entire cost for the loan, and includes APR, finance charges, and the total dollar amount.
