Under the Truth in Lending Act (Regulation Z), the annual percentage rate is "a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made."
The annual percentage rate (APR) states the cost of credit as a yearly percentage and folds in not only the interest rate but also certain required charges, such as some origination fees, so it often gives a fuller picture of cost than the interest rate alone. In the United States, the Truth in Lending Act requires lenders to disclose the APR before you commit, which allows offers to be compared on a consistent basis. APR can be fixed or variable. It is a standardized cost measure rather than the dollar amount of interest; the actual interest paid also depends on the principal, the term, and how the balance is paid down. Reviewing the APR alongside the payment amount, the schedule, and the full written terms shows what a loan costs.
The annual percentage rate is a disclosure required by the Truth in Lending Act for consumer credit. On a closed-end loan it appears in a standard box alongside the finance charge, the amount financed and the total of payments, so borrowers can compare offers on the same basis. It is calculated with a method set out in Regulation Z that accounts for the timing of each payment as well as the charges included in the finance charge.
Because it is a yearly measure, the figure can look large on a loan that lasts only a short time even when the dollar cost is modest, and it can look small on a long loan whose total cost is high. Reading the rate together with the finance charge in dollars gives a fuller picture than either number alone.
Regulation Z allows only a small tolerance for accuracy in the disclosed rate, and it requires the rate and the finance charge to be shown more prominently than most other terms in the disclosure. Charges that are not part of the finance charge, such as late fees, are listed separately, which is another reason to read the full agreement and not only the headline rate.
An example
A borrower is comparing two installment offers for the same amount. The first has a lower stated interest rate but a charge for processing; the second has no processing charge and a slightly higher interest rate. The disclosure for each loan folds the required charges into one yearly rate and also shows the finance charge in dollars, so the borrower can see which offer costs less in total.
Common misconceptions
Myth: The annual percentage rate is just the interest rate.
In fact: It includes the interest rate plus certain required charges, so it is usually equal to or higher than the interest rate alone.
Myth: A yearly rate means the loan lasts a year.
In fact: The rate is annualized so that loans of different lengths can be compared. The actual cost in dollars depends on the amount borrowed and how long it is outstanding.
Myth: Two loans with the same yearly rate cost the same.
In fact: The same rate on a larger amount, or over a longer schedule, produces a larger finance charge in dollars.
What to check
- The finance charge in dollars next to the yearly rate.
- Which charges are included in the rate and which are listed separately.
- Whether the rate is fixed or variable.
- The total of payments, which shows the full amount you will repay on schedule.
How this applies at Desert Rock Capital
At Desert Rock Capital, your actual amount and terms, including the cost of credit, are disclosed in the loan agreement before you sign anything, and you see every biweekly payment and the total cost in writing first. There is no prepayment penalty, so paying early means you only pay interest for the time you had the loan.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.