The federal Truth-in-Lending Act requires that borrowers receive written disclosures about important terms of credit before they are legally bound to pay the loan. This is why the APR is a Very Important Number.īut the APR is not the only thing that Regulation Z requires the lender to disclose. This is not true for interest calculations. All disclosures have to use the same equations. Periodic interest never is used in the equation.Īlso, the TILA creates rules for how to calculate an APR. The APR calculation uses for input the anticipated total payment amounts. Once you understand these details, then you would be able to calculate the interest due and compare the results.Īside from fees, the APR isn't concerned with these details. the interest allocation method for short or long periods and.the days-per-year used for odd day interest calculations.If you wanted to compare two loans using their quoted interest rates, you would have to know and understand a lot of details about how the interest rate is used to calculate each loan's interest. Why can't I just compare the interest rate of two loans and select the loan with the lowest rate? The APR was created by the TILA to give borrowers a way to compare loans. The lower the rate-of-return for the lender, the less profit they are earning on the loan they issue. What's important for the borrower to remember, is the lower the APR, the less the loan will cost, which makes sense. Remember, the loan is the lender's investment and all investor's hope to make a return. Therefore, the APR is (basically) the rate-of-return earned by the lender. The annual percentage rate is the cost you pay each year to borrow money, including fees, expressed as a percentage. The interest rate does not include fees charged for the loan. The Consumer Protection Financial Bureau paraphrases the Truth In Lending Act (TILA) of 1968, which says the "annual percentage rate is the cost of credit expressed as a yearly rate in a percentage." What is the difference between an interest rate and the annual percentage rate?Ī loan's interest rate is the cost you pay each year to borrow money expressed as a percentage.
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