A measurement used to compare different loans offered by competing lenders, which takes into account both the interest rate and closing fees
Unlike an interest rate, an APR gives you a bigger picture when shopping for the best deal on a loan. An APR lets you see the total cost of a mortgage, including closing fees and lender points over the life of a loan - not just the interest due. Even though lenders are required by law to show a loan's APR, they don't all use the same fees in their calculation, skewing the comparison. So always check to make sure that the APRs you are comparing include similar fees.
Example: How to compare loans using the APR
$100,000 fixed rate loans
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|||||||
|
|
Loan | Interest rate | Loan fees | APR | |
|
|
|||||||
|
|||||||
|
|
7.875% | $2,000 | 8.087 | |
||
|
|
8.000% | 0 | 8.000 | |
||
|
|||||||
|
|||||||
|
|
|
|||||
|
|||||||
Even though Loan A's interest rate is lower, its higher APR signals that there are more fees to pay.
More on: APR