Definition
The annual percentage rate (APR) is a standardized calculation of interest rates to express the cost of credit over the course of one year. Interest rates are expressed as an APR by law in order to reduce confusion of rates by consumers.
Analysis
Some creditors exploited consumer confusion by advertising rates that appeared to be lower, but were expressed as monthly periodic rates or other similar periods of time. Many creditors also tried to claim lower interest rates, only to offset those with higher fees that were not considered “interest.”
The single biggest piece of legislation that standardized interest rate reporting was the Truth in Lending Act. This law mandated certain minimum standards that lenders had to adhere to.
The advantage for consumers is that they can instantly evaluate two different credit offers by comparing the interest rates charged. This interest rate, expressed as an APR, must be prominently displayed on a standardized format and in a readily readable font.
Credit card issuers and other lenders express their interest rates as APRs, which make comparison much easier. Consumers should still evaluate other aspects of credit offers, such as annual fees, nuisance fees and other important cardholder details.
Related Links
National Credit Card Rates by Bankrate
Current Mortgage Rates by Bankrate
