While talking about debt, we often come across the terms APR & Interest Rate. But people know very little or nothing on these topics. APR plays a very crucial role in Debt Consolidation. We focus here on the various aspects of APR.
Various definitions of APR are available. Here are a few of them.
1. APR is a measure of the cost of credit, expressed as a nominal yearly rate.
2. APR is the equivalent interest rate (considering all additional costs) charged on a certain loan amount. It is a function of the loan amount, interest rate, total additional cost, and the loan term.
So, in short we can say that, APR = Interest rate + Extra cost
Components: The fees included within the APR vary from one lender to another. The fees included within the APR involve charges related to the making of the loan and other fees such as title fee, escrow fee, attorney fee, tax service fee, home inspection fee, recording fee and credit report fee. The fees for the preparation of loans include loan processing fee, underwriting fee, document preparation fee, private mortgage insurance, loan application fee, credit life insurance and appraisal fee.
Importance of APR: Lenders often mislead borrowers by charging hidden fees. This is where the APR can come into help. It is used to compare the true cost of various loans and find out whether the creditor has included any hidden fee. Before going in for any loan, one should check the APR of that loan to have a clear picture about the amount he will be liable to pay back against the borrowed amount.
Difference with Interest Rates: The APR and the interest rate are different from each other. The APR takes into account extra costs along with the normal interest rate. These extra costs vary from one lender to another and hence the APR varies. However, in case of loans having no extra cost, the APR is same as the interest rate.
Legal Support: In order to protect consumers from the tricks of lenders and clear their doubts on terms related to credit and rates, the FDIC enacted the Truth in Lending Law in 1968. Regulation Z. Part 226, under Truth in lending Act came into effect from July1, 1969. This section defines the Annual Percentage Rate (APR). By this law, a creditor is bound to disclose the APR to a borrower within three days of receipt of loan application. The creditor cannot hide the extra costs and is liable to reveal all the costs along with the interest rate to the borrower before signing any agreement. For further details, check FDIC.
Calculations: The calculation of APR is slightly complex. Different lenders use different methods for calculating the APR. The most prominent and scientific method is the Newton-Raphson method. It is widely used by different creditors. Look out for an APR calculator.
APR is a very effective tool for protecting consumers against inaccurate and unfair credit billing and credit card practices. So if you are in debt and planning for debt consolidation, the APR is the best way to judge who can provide you with the best solution. Debt Consolidation not only makes you debt free but also reduces the APR to save a lot of money. So even when you are in serious debt problems, you end up saving with Debt Consolidation.
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