Interest rates have seen a steady decline of the past year and with the recent cut by the Federal Reserve they are now hovering around the lowest rates in history. With rates being at an unprecedented low in the United States and around the world, borrowing is at an all-time high as individuals rush to purchase and refinance large items at today’s record low rates. If you are considering purchasing or refinancing a large item that you must finance it is important to know the difference between interest rate and annual percentage rate (APR) to get the best loan available to you.
Interest Rate is the annual cost of borrowing the principal amount of the loan. Most often this will be the advertised rate that you will see lenders providing to the public in large bold numbers. However, when reviewing you loan documents you will often find a different rate, that of the APR.
The APR is calculated separately of the interest rate and is the combined cost of interest on the principal plus the cost of other fees that you might be paying as well. For example: most mortgage companies have an array of fees that often are reflected in your APR but not your interest rate such as a loan origination fee, documentation fees, discount points, closing cost, and borrower paid mortgage insurance. These fees must be displayed in the APR according to The Truth in Lending Act. The APR is a more true reflection of the total loan cost and will allow you to shop loans in a more apples to apples comparison being a more precise means of determining the accurate cost of a loan.
You must be diligent when shopping for a loan, many times you will hear a lender quote the interest rate or even quote a discounted interest rate only to fine large fees or “points” hidden to get you that super low interest rate that they quoted you. When comparing loans pay close attention and compare the APR to decide the least expensive loan.
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