APR Explained
For a really in-depth explaination of APR see this wikipedia article. If, like me, you want the short version, then please read on.
APR (or Annual Percentage Rate) is an expression of the effective interest rate to be paid on a loan or earned on savings and investments. APR is a tool to enable consumers to compare financial products such as credit cards - in the UK lenders have to disclose the APR for all their products. As APR ‘rolls up’ expenses such as application fees, so if your product has costs associated with it these will be included in the APR making for a fair comparison between products.
APR does not solve all problems for comparing products though. Regulators have been unable to finalise which fees must be included in the calculation, and we all know that if a loophole exists to make a fee ‘invisible’ then the financial institution is probably going to try it. That said, APR is still the best tool consumers have for comparing costs.
Another potential problem with APR is that it is not good for comparision of products of different durations. The APR for a 30 year loan cannot be compared to the APR of a 20 year loan. Also, if a product such as a mortgage is paid off early, then the effective interest rate will be much higher than the APR quoted.
Handy links (well, maybe. I don’t like to get too involved with the calculations):