APR was created to make things simpler for loan applicants, yet, it does not seem to have fulfilled its destiny. Instead, lenders have managed to exclude different fees and charges or other loan conditions from the APR and actually use it to promote allegedly low cost loans when all the charges that really turn loans into expensive transactions are concealed. When it comes to home loans which come in high amounts this is particularly relevant and especially complicated.

The many variables included on APRs are presented as a sole charge on a percentage. This is usually useful as it provides the means for comparing different mortgage loans and see which one is cheaper. Yet, the cheapest one may have a higher APR and you can easily miss it if you concentrate only on the APR. The average borrower will find in these figures a way to compare prices but he should not confide only in these rates to make a decision that will affect them for a long period of time if not his whole life.

APR: Worthless?

Many claim that the annual percentage rate is a worthless figure. In order to justify this claim they state that every lender calculated the APR in different way which results in a poor comparing ability. However, truth is that there are some regulations regarding the APR and what it needs to be included in it. Therefore stating that the APR is a worthless concept that does not reflect what it promises is at least an exaggeration.

Nevertheless there is a bit of truth about the previous claim, in a particular sense though. Many lenders conceal certain additional fees and do not include them in the APR. By doing this they can show a lower APR than other lenders and therefore lead many to think that they are less expensive. For instance, some may state that they do not charge administrative fees or issuing costs but instead charge separately for the documentation needed to apply or including fees that can be triggered or not according to the applicants behavior which of course can not be included in the APR because they are not certain.

What Does It Include?

The APR or annual percentage rate is however, a good tool for starting up loan comparisons. You need to understand that it is not enough to use the APR, you need to further read the loan contracts thoroughly and request to the lender a list of all the fees and charges associated with the loan. If you do, they are obliged to comply and send you a document containing all the costs that are included in the loan application, processing and if applicable, the prepayment.

It includes the interest rate charged for the money owed, administrative fees, insurance fees, taxes, and other government charges, etc. It does not include those fees and charges that are not always applied like prepayment charges, penalty charges for late payments or missed payments, etc. Therefore, you need to be aware of these other fees so you can compare loan quotes methodically.

Author Bio: Kate Ross has a Master in Finance and has been a financial consultant for years. She specializes in Guaranteed Personal Loans and also in helping people to get approved for Guaranteed Loans for Bad Credit, unsecured loans, poor credit loans, no credit check loans, student loans among many other financial products. Visit her at http://www.speedybadcreditloans.com

Category: Finances
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