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APR

APR stands for Annual Percentage Rate. It is a further representation about the costs associated with your loan. It accounts the total cost of your loan: Interest rates, underwriting fee, provision fee, survey fee, collateral assessment fee, notary fee etc. that often get overlooked. The APR takes all these factors, and convert them into an effective annual interest rate .

How do you measure a good APR?

Please look at illustration table below :

A B C
Term (months) 12 12 12
Interest Rate 10% 10% 9.5%
Total Loan 1,000 1,000 1,000
Total Financing Fees 0 10 20
Amount Financed 1000 990 980
Monthly Payment 87,92 87,92 87,68
Total Interest 54,99 54,99 52,20
Total Financial Charges 54,99 64,99 72,20
Total Payments 1054,99 1064,99 1072,20
APR 9.96% 11.74% 13.02%

If you’re a borrower, choose the lowest APR you can get. Because, the more you pay for your loan, the higher the APR.

Person B: he gets the same loan offer like person A. but he has to pay additional $1.000 administration fee. Even when person B pay the same amount of monthly payment like person A, he has a higher APR. Because even if his total payment is exactly the same as person A, he only get $199.000 because of the administration fee.

Person C : he gets cheaper loan than person B, 9.5% interest rate for the same amount of loan. But he has to pay $2.000 of administration fee. And our calculation shows that even when person C get the lowest rate of interest, lowest total payment and his monthly payment is cheaper, he actually have the highest rate of APR. So lower rate of interest doesn’t necessarily means lower APR.