Annual Percentage Rate

Annual Percentage Rate (APR) is the annual rate charged for borrowing or made by investing, expressed as a single percentage number, inclusive of fees and costs associated with the transaction.

Annual Percentage Rate

Annual Percentage Rate (APR) is the annual rate charged for borrowing or made by investing, expressed as a single percentage number, inclusive of fees and costs associated with the transaction.


Annual Percentage Rate Calculation

The Annual Percentage Rate is the equivalent interest rate (or yield) considering all the added costs to a given loan (investment). The APR would equal the interest rate if there are no additional costs to a given loan.

The Annual Percentage Rate can be looked at in two primary ways: the nominal rate, which is a non-adjusted simple interest rate, or the effective rate, which takes compound interest into account. While the nominal rate is relatively straightforward, there can be many different ways of calculating the effective rate, depending upon how fees are factored into the equation.  The following costs may be included in calculation:

  • Up front costs such as Brokerage fees, finders fees, points or mortgage insurance;
  • Constant costs such as monthly mortgage insurance premiums;
  • Variable costs such as declining insurance premiums or different fixed interest rates for fixed terms; and
  • Back end costs such as closing out fees, discharge fees charged by the lender to register the mortgage in the land registry office when the loan is fully amortized.

Annual Percentage Rate Interpretation

The cost of loans can vary in terms of transaction fees, interest-rate structure, late penalties and other factors. The borrower should not decide on any specific credit agreement before understanding the costs. The Federal Truth in Lending Act of 1968 requires lenders to calculate the cost of credit as an annual percentage and disclose the annual percentage rate in large bold type in loan application documents. Credit card companies are allowed to advertise interest rates on a monthly basis (e.g. 2% per month), but are also required to clearly state the APR to customers before any agreement is signed. 

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