The concept of Annual Percentage Rate or APR was introduced in order to help consumers get a clearer picture of the actual cost of loans including all fees. This number is expressed as an annual percentage of the entire loan or credit line granted taking into account all costs and fees including the interest charged as well as any one time fees or maintenance fees.
The APR for a loan can be a useful tool for consumers to compare loans and lenders by providing a unified metric. This helps prevent the problem of “hidden costs” which may confuse a consumer it favoring a specific loan due to an apparent lower rate, not realizing the actual cost of the loan is higher due to some sort of set up or maintenance fee.
By law, lenders both in the U.S. and in the U.K. are required to disclose the Annual Percentage Rate to the customer prior to finalizing a loan or credit application. Lenders however, have come up with ways to work around disclosing the true cost of loans through the APR and may include certain fees which are not included in the APR calculation by law. These fees may include what’s called an arrangement fee as well as constitute various penalties on early redemption of the loan which may be an issue if early redemption is an option you are considering.
Although lawmakers are taking positive steps to help consumers, there is no substitute for doing your homework and educating yourself with the proper tools to analyze the deal presented to you. Whether you are looking for a remortgage loan, seeking a home improvement loan or simply applying for a credit card, being prepared can definitely pay off.
