The annual rate
that is charged for borrowing (or made by
investing), expressed as a single percentage
number that represents the actual yearly cost of
funds over the term of a loan. This includes any
fees or additional costs associated with the
transaction.
Loans
or credit agreements can vary in terms of
interest-rate structure, transaction fees, late
penalties and other factors. A standardized
computation such as the Annual Percentage Rate
provides borrowers with a bottom-line number
they can easily compare to rates charged by
other potential lenders.
By law, credit card
companies and loan issuers must show customers
the APR to facilitate a clear understanding of
the actual rates applicable to their agreements.
Credit card companies are allowed advertise
interest rates on a monthly basis (e.g. 2% per
month), but are also required to clearly state
the APR to customers before any agreement is
signed. For example, a credit card company might
charge 1% a month, but the APR is 1% x 12 months
= 12%. This differs from annual percentage
yield, which also takes compound interest into
account.
