When you borrow money, you repay the funds over time, with interest and fees included. The APR, or annual percentage rate, is a calculation of the total annual cost of borrowing money and includes fees and other charges, in addition to interest. Lenders often advertise a low interest rate. But the interest rate alone does not account for all costs of the loan, which is why it’s important to thoroughly review loan documents to make sure you understand the terms of the loan, the interest rate, the APR, and all the fees associated with your loan.
How Is APR on a Personal Loan Calculated?
The APR should be listed on any personal loan quote in writing. APR is calculated by multiplying the periodic interest rate and fees by the number of periods in a year. It’s best represented by the following formula*:
(Total interest charges + fees)/total loan amount
APR = _______________________________________X 365 X100
Total number of days in loan
*This formula is provided only for educational purposes and is not intended to provide financial, insurance, tax, or legal advice.
Once you know your APR, you can use your lender’s loan calculator to determine your monthly payments.
APR vs Interest Rate: What’s the Difference?
The difference between an APR and an interest rate is that an interest rate does not include any fees. In a home mortgage loan, for example, fees may include a home appraisal, origination fees, and transaction fees. If you need mortgage insurance, that is another fee that may be included. For a credit card, fees may consist of a credit application fee, bank processing fees, and transaction fees. For personal loans, you may find application and origination fees.
To find the best personal loan to fit your needs, consider comparing APRs, along with the full terms and conditions of individual loans.
Interest Rates and APRs on Personal Loans: What to Look For
Lenders often publicize their interest rates in big bold numbers, but did you know that they are required to do the same for APRs? Because lenders may entice you with low interest rates, the federal government now has a long list of rules intended to ensure that lenders are fair and that borrowers have the tools to make good decisions. For example, Lender A might offer a 5% interest rate with an APR of 6.5%. Lender B offers a 4.5% interest rate with an APR of 7%. Which will result in a lower monthly payment? Lender A’s loan offers a lower monthly payment because the APR is lower. But your monthly payment isn’t the only factor consider when taking out a loan.
Keep in mind that there are fixed interest rates as well as variable ones, which means your APR will also be either fixed or variable. Fixed means the rate stays the same for the life of the loan, while a variable rate may increase or decrease over time.
APR and The Truth in Lending Act
A federal law created in 1968 to promote honesty in lending, the Truth in Lending Act (TILA), regulates how lenders disclose APRs and interest rates to the public. TILA requires lenders to present all terms and costs regarding consumer credit, standardizes the process of calculating and disclosing borrowing costs, and makes it easier to compare loan offers and credit costs across lenders. TILA even regulates how lenders advertise their rates, noting such specifics like how the font size for an interest rate can’t be larger than the APR font.
TILA provisions apply to car loans, home mortgages, credit cards, and home equity lines of credit. Lenders are required to disclose, in writing: the APR, the number of payments, the monthly payment amount, any late fees or service charges, and whether or not you can repay the loan early without penalty. Consumers should always be given a copy of the TILA disclosure page and have the opportunity to review it before signing any loan contract.
Do you know your current APR? At Mariner Finance, we make sure you understand the full terms of your personal loan. Take a look at our personal loan options online or contact a local branch today.
