APR,
or Annual Percentage Rate, is the Total Cost of
Borrowing that money expressed as a percentage.
Your payments are NOT based on APR. It is simply for you to be informed.
Here's how it works:
Let's say you borrow $1,000 for one year.
You agree to pay 6% interest
You agree to a one-time upfront charge of $50, taken out of your $1,000.
You have 11 payments of $86.07
+ 1 payment of $86.03, for a total of $1,032.80
That number is arrived at by mathematical algorithms that effectively
take
$1,000
* 1.0005 (the rate for one month) - $86.07,
- leaving a balance of $913.93
for Month2
$913.93 * 1.0005 - $86.07 = $837.45
$837.45 * 1.0005 - $86.07 = $755.57
. ...and so on until
$85.60 * 1.0005 = $86.03, your last payment. |
(The computers
and algorithms calculate the number to keep the payment consistent even
though the amount of interest / principal varies per payment)
Now if we use that same formula
and work backwards using the SAME payments, but changing the TOTAL to
$950 instead of $1000, we get an APR of 6.001%. Clear?
If
so or if not, here's all you really need to know:
The APR is for your protection.
In the case of Negative Amortization (where the interest you're required
to pay may be less than what you're being charged, e.g. your loan balance
could increase in some months - also called "Pay Option Arm"
or "Deferred Interest") your RATE and your APR may be very different.
For example, I can get you a 1.95% loan, but the APR is 4.67% - which
means at the end of the day, when you pay the loan off, you're really
paying 4.67% if you broke down all the payments, added them up, and expressed
that as a percentage.
Expect the APR to be slightly
higher than the Rate, generally. That's normal. The difference will
be more pronounced in a 10-yr or 15-yr than a 30-yr Fixed Rate Mortgage.
APR
is about educating and empowering you to make the right decision -
based on all your options. Start here to get yours. |
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