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Q. What are annual percentage rates? A. The annual percentage rate (APR) is the
cost of credit on consumer loans expressed as a percentage rate on a yearly
basis. Example: 18%, 8.5%. Q. Why is it important to compare APRs when shopping for a loan? A. The APR allows you to quickly compare the
cost of loans from several lenders. It is the best measure of the true
cost of credit. The lower the annual percentage rate, the lower the cost
of credit. Some lenders offer low interest rates but have fees that add
to your borrowing costs. These additional fees increase the annual percentage
rate. The examples below show the impact of APRs on the cost of borrowing.
Q. What is the difference between interest, interest rate, and a finance charge? A. Interest is money paid for the use of someone else's money. Banks pay you "interest" when you leave your money on deposit with them in savings accounts and certificates of deposit. You pay the bank interest on money you borrow for your home, cars, and other items. Interest rate is the percentage of money added to your principal each time interest is calculated. A finance charge is the total cost
of borrowing expressed in dollars. For many loans, it includes only the
interest. For other loans the finance charge could be a combination of
interest, service charges, points (for mortgages), credit-related insurance
premiums, and any fees required by your lender. Example 1: Savings Account
Example 2: Quarterly Loan Payment
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