Question

Banks often advertise loans using APR, as do automobile dealers, and other creditors. Should you compare interest rates using APR? In the discussion include information about the difference between APR and EAR.

Answer 1

Answer :-

a) The term annual percentage rate of charge, corresponding sometimes to a nominal APR and sometimes to an effective APR, is the interest rate for a whole year, rather than just a monthly rate, as applied on a loan, mortgage loan, credit card, etc.

Compare interest rates using APR:-

a) An annual percentage rate is a broader measure of the cost of borrowing money than the interest rate.

b) The APR reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan.

c) APR is usually higher than your interest rate.

Difference bewtween APR and EAR:-

a) The main difference between APR and EAR is that APR is based on simple interest, while EAR takes compound interest into account.

b) APR is most useful for evaluating mortgage and auto loans, while EAR is most effective for evaluating frequently compounding loans such as credit cards.

Thank you.