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What is a Loan APR?

By Felicia Dye
Updated May 17, 2024
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APR is a common acronym for annual percentage rate. A loan APR refers to the percentage of interest a person will pay on a loan each year. This is an important factor to consider when comparing potential sources of borrowed funds. Borrowers must be careful, however, because loan APR may not be as simple as it seems.

One of the reasons a lender can make a profit from loaning people money is because there is generally interest that must be repaid in addition to the amount borrowed. This interest is usually calculated using a loan APR, which is expressed as a percentage. Although it may be paid in installments in the same manner as the loan, the interest is commonly calculated on an annual basis.

Loan APR should be considered when borrowing money. These interest rates are essentially the lender's fee for providing you the funds. If the loan APR is too high, then the cost of borrowing the money may be too high.

Consider an example where there are two possible lenders agreeing to loan Tara money. It may seem that one option is just as good as the other as long as she gets the funds she needs. If Bank A has a loan APR of five percent and Bank B has a loan APR of ten percent, these two loans are far from the same. If Tara borrows money from Bank B she will pay twice as much interest.

When the loan APR pertains to mortgage funds, it can become a bit more complicated. This is because other amounts may be included. Common examples of costs added to the APR include discount points and processing fees. Another factor that can make percentage rates complicated is that they are not always calculated in the same manner. This means that two lenders with identical APRs could charge different amounts for the same loan.

In the United States (US), a federal law that is contained in a body of legislation known as the Truth in Lending Act has tried to protect consumers to a degree by requiring that certain annual percentage rates be disclosed. If a lender advertises a mortgage loan, this legislation requires that the annual percentage rate be provided.

When a person borrows funds, there are several ways she can offset the effects of an unfavorable APR. First, she can refinance the loan at a lower rate. Second, she can repay the loan at a faster rate, which should reduce the amount she pays in interest.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

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