What Is an Annual Percentage Rate?

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When you borrow money, you may be quoted more than one interest rate. One interest rate is the actual loan rate used to calculate your payments. Your lender also will report your cost of borrowing as an annual percentage rate. The APR is a better representation of the overall cost of borrowing because it incorporates additional lending fees such as mortgage points, origination fees and other closing costs.

Terms of Credit

Lenders are required to report the APR as part of the Truth in Lending Act, which Congress passed in 1968 as a form of consumer protection against unscrupulous lending practices. Part of this legislation requires that lenders make certain disclosures about the terms of credit and standardize the way they disclose costs associated with borrowing. The APR is the standardized method for reporting the cost of borrowing.

The loan's interest rate and the APR are different because the loan is just part of the overall borrowing cost and the APR includes additional fees in the calculation. If there are no lender fees, the APR equals the loan interest rate. Usually, there are closing costs and origination fees associated with a loan, and these additional costs result in the APR being higher than the loan interest rate.

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