Dear Dr. Don,
What items are included in an APR? Does it include the interest rate on the loan?
-- Bob Bewildered
Dear Bob,
Lenders face specific requirements in how they calculate the annual percentage rate, or APR, on a loan. Those requirements are spelled out in the Truth in Lending Act, or TILA.
TILA is also known as Regulation Z of the Federal Reserve Board.
As described on the Fed's website, Regulation Z "prescribes uniform methods for computing the cost of credit, for disclosing credit terms, and for resolving errors on certain types of credit accounts." The intent of requiring lenders to provide the APR of a mortgage loan is to allow consumers to compare rates across lenders.
The APR definitely includes the interest rate on the loan. It also includes the disclosed finance charge on the loan. Because the disclosed finance charge can vary from the actual finance charge on the mortgage, APR isn't a perfect, apples-to-apples comparison across lenders. Regulation Z spells out the permissible tolerances in calculating the APR in Title 12, Part 226.
Short of calculating the APRs on your own, using the lender-provided APR estimate is a reasonable approach to comparison shopping across lenders.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.
Ask the adviser
To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.
Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.
Create a news alert for "debt"