APR folds fees into the rate; the interest rate alone doesn't. Worked examples for mortgages, auto, personal, and business loans showing why two loans with the same interest rate can cost very different amounts.
Interest rate is the annualized cost of borrowing principal. APR is the interest rate plus mandatory fees (origination, points, mortgage broker fees, certain closing costs) annualized across the life of the loan. APR is always ≥ the interest rate; the gap shows how much fees cost you.
The Truth in Lending Act (TILA) requires consumer lenders to disclose APR so borrowers can compare loans of the same type on a standardized basis. APR settles the apples-to-apples question when two offers have different fee structures.
No. A 6.50% interest rate with 2 discount points and a $2,000 origination fee can have a higher APR than a 6.75% rate with no points and no origination. Always compare APR-to-APR, not rate-to-rate.
Credit cards use multiple APRs: an introductory APR (often 0% for 12-18 months on purchases or balance transfers), a standard purchase APR, a cash-advance APR (higher), and a penalty APR. The intro APR ends on a specific date; the purchase APR governs everything from then on.
Under the CARD Act, an issuer can apply a penalty APR after a payment is 60+ days late. Penalty APRs are typically 29.99% and can apply to existing balances if the delinquency exceeds 60 days. After 6 consecutive on-time payments, the issuer must reconsider lowering it.
Under Regulation Z, finance charges in APR include: origination fees, discount points, mortgage broker fees, certain closing costs (e.g., document prep), private mortgage insurance, and any other charge required as a condition of credit. Excluded: taxes, title insurance, appraisal, and other third-party charges not required by the lender.
MCAs are legally structured as the purchase of future receivables, not loans, so TILA doesn't apply. California (SB 1235), New York (S5470B), Virginia, Utah, and Georgia have enacted commercial-finance disclosure laws that require APR-equivalent disclosure on MCAs in those states.
No. APR assumes you hold the loan to full maturity. If you pay off a 30-year mortgage in 7 years, the actual cost per year is higher than the disclosed APR because the fixed origination fees are amortized over a shorter period.
Common tactics: (1) excluding fees by routing them through third parties not 'required' by the lender, (2) discounting an intro rate to make APR look lower (since APR can be calculated against a blended rate), (3) hiding compulsory add-ons like credit insurance in monthly payments instead of in APR, (4) for variable-rate loans, quoting today's index value when caps and lifetime ceilings would tell a different story.
APR is a simple annualized rate; APY (Annual Percentage Yield) accounts for compounding. On a loan, the practical impact is small for monthly-compounded products, but on revolving debt that compounds daily (credit cards), the effective yearly cost is slightly higher than the quoted APR.
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