- Annual Percentage Rate (APR) is the cost of borrowing per year
or income earned from an investment per year, expressed as
percentage of Principal. This includes mainly interest, and fees or
other charges if any applicable per year.
- Truth in Lending Act (TILA) mandates that each lender should
disclose the actual cost of borrowing to the prospective borrowers
so that the they can take informed decision. For this purpose, the
APR which is the total cost of loan should be informed to the
customers. This is to protect the customers from unfair practices
and hidden charges. The customers can compare APRs of various
lenders and choose from among them, according to their
preference.
- Effective Annual Rate(EAR) is the simple rate of interest
representing the actual amount of return during the period. To make
it simple, it is the total amount of interest on a deposit or loan,
applicable for the period of one year, as a percentage of
principal. The amount of interest taken for this purpose could
contain compounding effect within the period, but the same is
converted into the form of rate in the Effective Annual Rate.
APR may contain fees and other charges
along with interest and is the rate quoted, to be applied with or
without compounding at the desired/ stated frequency. On the other
hand, EAR is the statement of cost as a rate, including the effect
of compounding, if any.
- While comparing loans, APRs can be used to evaluate the cost
involved, including the effective interest rate.