what does APR mean and how do u calculate it?

Answer 1

Annual Percentage Rate --

The annual rate is that amount that is charged for borrowing (or made by investing). It is expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.

Loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors. A standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other potential lenders.

By law, credit card companies and loan issuers must show customers the APR to facilitate a clear understanding of the actual rates applicable to their agreements. Credit card companies are allowed advertise interest rates on a monthly basis (e.g. 2% per month), but are also required to clearly state the APR to customers before any agreement is signed. For example, a credit card company might charge 1% a month, but the APR is 1% x 12 months = 12%. This differs from annual percentage yield, which also takes compound interest into account.

Does that help?

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if you are looking at a car loan or a home loan, often times they roll in the cost of the loan (e.g. origination fees) and that also gets added into the APR.

Answer 2

The APR, which stands for "annual percentage rate", is a good idea badly executed that is as likely to mislead consumers as help them.

One of the reasons shopping for a mortgage is so hard is that the cost of a mortgage includes more than just the interest over the life of the loan. In most cases lenders also want you to pay them some cash up front. Some of the cash charges, referred to as "points", are quoted as a percent of the loan amount. Other cash charges, sometimes called "junk fees", are a fixed dollar amount regardless of the size of the loan.

Here is an example. Loan A has an 8% rate, 1 point and $350 in other fees while B has a 7.5% rate, 4 points and $100 in fees. Which is the better deal? You are right to scratch your head, since it is not at all obvious.

The intent underlying the APR is a good one. It is designed to make it easier to shop for a mortgage by pulling together the different components of the price into a single comprehensive cost of credit. Then mortgages could be compared on an "apples to apples" basis. A comparison of APRs in the example indicates that B is the better deal, since the APR is 7.93% compared to 8.14% on A.

But is the answer right? It is if your loan runs for its full term. Returning to the example, assume a loan of $100,000 and that the loan runs for 30 years. On loan B you would pay $4100 up front, or $2750 more than on A, but you would save on interest relative to A in every subsequent month. In the first month that saving is $41.66 and over 360 months it adds up to more than $12,000. The interest savings on B outweigh the larger up front cost by a substantial margin. This is what the lower APR on B tells us.

The problem is that about 90% of all borrowers pay off their loans before term when they buy another house or refinance their mortgage. Expected early loan termination can shift the balance of advantage between the loans being compared.

Suppose a borrower choosing between A and B expects to be in the house only 5 years, for example. Then the larger up front cost on B stays the same at $2750, but the interest savings on B now run for only 5 years rather than 30, and accumulate to only about $2500. Loan A now becomes the better deal and the lower APR on B is flat-out wrong for that borrower.

The remedy is to make the APR "borrower specific" -- calculated for each borrower over the period specified by the borrower. Where the borrower has not yet been identified, as in newspaper ads, several APRs should be shown, e.g., 3 years, 7 years and term. But the Federal Reserve Board, the agency with regulatory responsibility, is not going to do this anytime soon.

Meanwhile, use the APR only if you believe you will be in your house 10 years or longer. If your time horizon is shorter, ignore the APR and shop by specifying the rate and requesting a complete itemization of all the credit charges you will be required to pay with that rate. With the rate fixed, the best deal is the one carrying the lowest total fees.

Answer 3

detailed explanation, http://www.choicefinance.net/faq/what-is-APR.htm

APR calculator, http://www.choicefinance.net/calculators/what-is-the-real-apr-calculator.php

Answer 4

Orlando, the mortgage business must be slow there...you had all that time to type a book here?? lol

Answer 5

Annual Price Reduction, I'm not sure how to calculate it.