APRs

APR stands for annual percentage rate. It is a standardized measure of the cost of borrowing over a year, expressed as a percentage of the loan amount. In consumer lending, the APR is intended to reflect not only the nominal interest rate but also certain fees and charges charged by the lender, providing a more complete picture of the yearly cost than the interest rate alone. However, the exact components included in the APR can vary by loan type and jurisdiction, so comparisons should consider both the APR and the underlying terms such as fees, payment schedule, and how interest is calculated.

APR types and timing: Lenders may offer fixed APRs, which stay the same for the term, or variable APRs, which can change with an index like the prime rate. The APR can be quoted as a nominal rate, while the effective annual rate (EAR) accounts for interest compounding. The way compounding is handled can affect the actual annual cost even if the quoted APR remains the same.

Regulatory context: In many jurisdictions, regulators require APR disclosures to help consumers compare offers. In the United States, the Truth in Lending Act requires lenders to disclose APRs for covered loans and credit products. Promotional or introductory APRs may apply for a limited period and subsequently revert to a higher rate.

Limitations: The APR is a useful comparison tool but does not capture all costs, such as late payment penalties or credit limits, and it may not reflect how much a borrower will actually pay if payments are missed or made irregularly. Users should examine all terms, including fees and compounding, to estimate total cost.