What is the difference between interest rate and APR?
Interest Rate and APR (annual percentage rate) are two ways of evaluation and comparison of loans. The concept of the interest rate is relatively easy to understand. This is simply the amount of interest charged annually from the loan. The 5% interest rate simply means that the debtor pays 5% interest each year. APR is a bit more complicated and refers to interest plus fees for a pre -billed loan, plus things like mortgage protection that are in its loan in its life. Some people call this a real percentage rate because they reflect some of the current fees associated with getting a loan, but the matter is a bit more complicated.
In assessing interest rate and APR, many people look at APR as the best way to compare loans. This may make a good sense in some cases because two different APR rates with the same interest can say a lot about the fees that are connected to the loanm. On the other hand, financial experts quickly observe that most people who get loans always plan to keep them forever. Since APR is spreading fees charged throughout the life of a loan, it may not precisely represent what fees the creditor is outside the pocket if it changes loans. The fees after pre -payment do not tend to disappear if the person turns into a new loan and could be removed from the total capital or the new loan would have to pay these fees.
The length of the loan has different effects on interest rate and APR. The interest rate, provided that it is solid, does not change. It remains the same whether the loan is for 20 or 40 years. APR is changing. It is easier to hide fees in longer loans so that APR does not seem much higher than the interest rate. Again, it should be noted that fees included in APR are considered paid in advance, so what may seem like a long time on a mortgage is to be considered more carefully. The actual comparison of initial fees can be moree used than comparison of interest rate and APR.
It is also important to realize that APR does not reflect all charges charged. This does not correspond to the fees for late payments and it is necessary to find out what fees lending institutions have the right to exclude in the calculation of APR. Yet, although this calculation is imperfect, it is generally a better basis for comparison than the interest rates themselves. Such a comparison should be followed by further control before determining the most attractive bidding offer.