Rates are super low but dont forget to check the APR
August 25, 2010 by admin
Historically low rates can offer a great opportunity for borrowers to borrow money at extremely low rates, but don’t forget to check the APR of the loan you are receiving to be sure that the fees and lender costs are comparable to other financing offers and that you are truly saving over the long haul. Borrowing money from any financial institution can be a very stressful experience. Issues such as interest rates, repayments and collateral all make for the borrowing and qualifying experience a bit overwhelming. The lenders APR disclosure is a piece of he puzzle designed to help make clarity out of all of the financial numbers and help consumers when negotiating loan terms.
One of the terms that you definitely need to understand, is one used by all banks and other lenders: APR. It is also one of the things that will determine whether you will be able to afford the repayments or not. APR is the acronym for Annual Percentage Rate. This has several meanings, as there is more than one kind of APR. APR is can be either effective APR or nominal APR. When talking about savings, APR is referred to as APY – Annual Percentage Yield.
It all seems very complicated but is, in fact, a matter of simple mathematics. Nominal APR is about the percentage that will be added to your loan calculated on an annual basis. It is not a compounded figure and therefore simple to calculate, e.g. 12% of $100 stays $12 so you end up paying $1 per month in interest.
It becomes interesting when you start working with compounded interest i.e. when you start paying interest on interest. This means that you have your initial interest and it then also is also calculated over a period of time = compounded.
This means that an interest rate of 12% no longer stays $12. In month one the interest repayment will be $1. In month two you will pay interest not only on $100, but the additional $1 that was added as interest. Now you pay $101 + $1.02 = $102.02. Therefore it is advisable to keep up with your payments or else the interest will keep mounting up.
It is important to note that there are a few concerns about the use of the terminology for APR. One of the concerns is that the terminology could be misleading or misconstrued. Another concern is that it might not be considered a valid legal term.
The failings of the APR are that nominal APR does not always fully measure in the way it should. Credit cards in particular calculate interest on a daily basis and then only add it to your statement at the end of the month.
When getting involved with a loan, make sure that you are fully informed before making a decision.