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Why Your Annual Percentage Rate Matters

Loans and mortgages function on a basic principle: someone is lent money, which they promise to repay after a specific length of time, with interest collected so the borrower can make a profit. What can make this process slightly complicated is the amount of money, the kind of loan, and the habits of the borrower/lender that can play into the final amount.

This final amount is determined by a metric called the Annual Percentage Rate, or APR. In Salt Lake City, the best mortgage rates are often judged by this metric since it’s a good indicator of how much the total cost of the loan is going to be.

So how is this metric calculated, and what exactly makes it a good indicator of the cost?

APR Calculations

The most basic way to calculate an APR will be something like this:

This number is expressed via the final interest rate and can be calculated to change on a monthly or annual basis, depending on your loan type. Additional calculations can take a while if you factor in repayment schemes, refinancing, and other additional methods that you can take to lower the repayment on your loan.

Why Does This Number Matter?

increasing rate conceptAPR is a good approximation of the total amount that you’ll be paying over the term of the loan, so the higher the APR, the higher your repayment will be. There are other factors not included in the APR number depending on what kind of loan you got, but overall, it’s a good indicator of how much money the lender will make from their investment in you.

Where Does this Number Matter?

Here’s a brief rundown on the different kinds of loans you can calculate APRs for and how this number plays a role in their costs:

●       Home loans and mortgages: the tricky part about these kinds of loans is that they often have other surcharges and fees excluded in APR calculation, such as closing costs and insurance. Lenders may not always include these calculations when giving you the APR, which means this will be something you’ll have to discuss with them separately. Alternatively, due diligence on every cost incurred and calculating that yourself is also a good option.

●       Credit cards: For credit cards, the APR is a good ballpark of how much can you reasonably expect to pay, plus a little extra to account for your card fees. This number is affected by compounding interest, so you’ll also need to factor in your repayment amounts and frequencies in calculating the total cost.

●       Payday loans: APR for payday loans isn’t something that the lender can normally give, which makes it important for the borrower to calculate independently. Oftentimes, these can reveal the notoriously high costs that payday loans can command, which can give the borrower some idea of what options can work for them. Or failing that, look for other means of financing.

APR calculation is a combination of communication, due diligence, and a lot of patience. Crunching the numbers properly ensures you aren’t crunched by the different fees and charges paying off the loan.

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