| The APR of a loan is the "Annual Percentage Rate". Once
upon a time, before marketing people ruled the world, this was always the
number you saw when looking for a loan. Then marketing people figured out
they could advertise any number they wanted for a loan and then hide the
APR in the fine print. A "rate" or "interest rate" is the part of the "cost
of borrowing" that you pay that only includes the amount used in the amortization
calculations. An APR, on the other hand, includes all other costs of borrowing
(like fees and points etc. etc.) expressed as a rate.
So, in summary, an APR, by law, has to include all of the many ways
that a lender has of sticking it to you. As a result, you can compare the
actual cost of one loan to another loan by comparing the APR's of the two
loans. So if one loan has a "rate" of 2%, but has a 2 points origination
fee and a $4000 "Daddy wants a new Lexus" fee, is that better or worse than
another loan with a "rate" of 7% but no fees? Simple, find and compare the
APR of the two loans. It should be stated somewhere in the marketing literature
for each loan.
|
|
