One of the most important elements of finding a loan or securing credit is understanding what it costs to borrow that money. But when the first statement arrives, it might not always be clear what went into calculating the monthly payment amount. Every lender is different when it comes to what’s included, but by understanding the APR, you can better prepare for what you’ll pay.
What goes into APR?
APR, or annual percentage rate, is often thought of as another word for interest. However, interest rate is only one factor that goes into calculating APR. Taking into account every cost associated with a loan, APR is designed to give you an overall picture of how much you should expect to pay for borrowing. Depending on the type of loan, factors can include interest rate, transaction fees, penalties, closing costs, GAP coverage, taxes and other charges. While not all of these factors may apply, APR should help you make a high-level apples-to-apples comparison of your loan and credit options.