Annual Percentage Rate is the cost of borrowing money on a yearly basis, reflected as a percentage rate. Its the measure of the cost of credit expressed as a yearly rate.
APR includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest.
The Annual Percentage Rate must be disclosed by law.
Example 1: A $100 loan repaid in its entirety after one year with a $10 finance charge ($9 interest plus a $1 service fee) has an APR of 10%.
Example 2: A $100 one- year loan with a $10 finance charge repaid in twelve equal installments (meaning the borrower has the use of less and less of the loan principal each month) has an APR of 18%.