Annual percentage rate can be termed as a process that helps in bringing out the interest rate and all other related charges that a borrower is required to pay for a particular loan. The annual percentage rate is not considered as a fully flawless method; however, it is good for comparison of different loan products. There are a number of loan products that are offered by the lenders in the market. All these loans are offered with different terms and conditions. Because of this, the borrowers may get confused while selecting a loan product. By calculating the annual percentage rate a borrower can get almost exact figures regarding the repayment options.
Annual percentage rate is dependent on a number of factors like different charges that are related to a loan product and mainly the loan tenure. Now, there are a number of loan products that are provided for different loan tenures.
The APR can compare two loans of same tenure. At the same time, if a mortgage loan is taken for a period of 20 years then it needs to be paid back in 20 years and the calculations are done according to that. But there are a number of customers who take the help of second mortgages or refinance loans or something else to pay back the loan. In such cases, the initial interest rate that has been calculated by annual percentage rate would surely differ from the original interest rate that the borrower has actually paid to close the loan earlier.
Annual percentage rate considers different charges like loan possessing fee, points, private mortgage insurance, underwriting fee, pre-paid interest, fee for preparing the loan documents, cost of credit life insurance and many more. But at the same time, the annual percentage rate does not count some other fees that are related to the loan process. These fees are attorney fee, recording fee, home inspection fees, appraisal fees, escrow fees, transfer taxes and many more.
There are several countries that have passed different laws like Consumer Credit Act 1974 prevailing in United Kingdom and Truth in Lending Act of United States of America, for the lenders so that the borrowers can be provided with the exact annual percentage rate of a particular loan product.