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What is the Annual Percentage Rate and Why Is It So Important?

Apr 25 2016

If you want to compare loan offers side-by-side, you’ll need to pay close attention to three items: the interest rate, the lender’s breakdown of loan fees, and the Annual Percentage Rate (APR), say the experts.

The most important loan term is the interest rate, which is the rate you’ll be charged for borrowing the money. It’s a single number that does not reflect the lender’s fees or any other costs associated with the loan.

The APR is a broader measure of the cost of borrowing the money, reflecting not only the interest rate you’ll be paying, but also some of the other fees you’ll be charged for the loan (more on this later).

How APR is Calculated

Lenders calculate APR by adding their fees for the loan into the interest rate. This is done by amortizing the fees out over the life of the loan as if they were additional payments, and then calculating a new rate, explains Nate Moch, group manager for Zillow’s Mortgage Marketplace.

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