What is the APR?

APR, which stands for Annual Percentage Rate, takes into account all the costs associated with a loan and then translates that figure into an annual percentage rate. The ARP number is designed to give you a quick and easy way to compare the true costs of one loan as opposed to another loan.

When dealing with mortgages the annual percentage rate factors in many of the closing costs and onetime fees and spreads these costs over the lifetime of the loan and then tells you how much they are going to cost you on an annual basis. Why is this important?

The problem when you are trying to compare loans on your own is that many lenders quite a simple interest rate than does not include the fees and other costs into the percentage rate. Because different loans from different lenders have different fees, commissions and closing costs, comparing the simple interest rate can be very misleading.

That’s why the Annual Percentage Rate, the APR, was created. Before the APR was created, lenders would use artificially-low simple interest to entice borrowers into loans that would end up costing them a great deal more than they originally bargained for. But now, with the APR, all of the costs involved with your loan are factored in, giving you a clearer picture of the actual price that you will pay for a loan over the entire life of the loan.

Since APR numbers are arrived at the same way regardless of the lender and regardless of the fees and commissions involved, comparing the APRs of different loans is a much more accurate way to judge the true cost of each loan.

Generally speaking, the loan with the lower APR, as opposed to the one with the lower simple interest rate, will end up costing you less in the long run.