An APR means Annual Percentage Rate is a numerical figure usually in single digit which is used to express the total interest, i.e. amount over and above the principal amount, which is charged by the lender as a charge for offering lending service. It is also called the cost of loan. It is the yearly amount a consumer must pay for acquiring a loan or other type of credit. Lending law requires that all lender clearly disclose the APR in all promotional material through which lenders seek clients.

This loan and cost disclosure is called the Truth in Lending Act. It was legislated in 1968 as a part of consumer protection act. Subsequently, it was revised and made simplified. The basic goal of this act was to express clearly to consumer the cost of availing loan so that the prospective borrower can compare and go for a loan which is most suitable for him.

However, though lenders disclose APR only for the sake of fulfilling a legal formality. At time the method of expressing APR makes it difficult for consumers to find out actual cost.

Though APRs is used to compare loans and determine the least expensive credit products, APR is also confusing at time. Because each lender may calculate APRs in a different way. Therefore, a loan with a lower APR may not necessarily be less costly than one with a higher APR. Lenders have some flexibility when it comes to calculating APRs. Along with fulfilling the requirements of law, they can underestimate the annual percentage rate of a loan by as much as 1/8 of a percentage point. For loans that are considered irregular, lenders may underestimate APRs by as much as 1/4 of a percentage point.

At time, various hidden fees are included in an APR to make APR more confusing. Such fees vary and depend upon the loan, credit product obtained. Points; prepaid interest; private mortgage insurance; and fees for loan processing, document preparation, and underwriting are commonly included in an APR. Sometimes loan application fees and credit-life insurance costs are included as well.

Cheap APR Loan

As the acronym APR itself describes, cheap APR means cheap or low annual percentage rate or lower annual cost to for the borrower. This low APR translates into lower installments for the borrower. Usually, lenders advertise their low APR schemes, which can be useful for you but be careful while choosing any lender because at time rates may be deceptive.

Cheap loan lenders calculate their APR through a system called risk based pricing. This means that they assess each individual's circumstances and credit record before deciding what rate to be offered. If the profile of the borrower is excellent and has a record of timely payments, he will be offered a low APR.

However, you must see if any hidden cost is included in the cheap loan which is not being reflected or is not in your knowledge. One such example is prepayment penalty, which means if you clear off your debt before the decided period; lenders charge a penalty in terms of certain percentage of the loan amount.

However, there are other factors to consider when making a loan application, such as acceptance criteria, price for risk and redemption penalties. It doesn't matter how cheap a loan is if your application is declined because you don't fit the lender's criteria.

Is a low APR always cheaper

‘NO’, you must compare the cost of different loan offers before deciding any particular offer. Just because a loan has a low APR or lower monthly payments it doesn't mean that it's the cheapest or best loan for you.

Before taking final decision, consider few common aspects, which are:

If a lower APR loan comes with pre payment penalty, it may not actually be a lower APR loan. So weigh up your options as you may find it better to opt for a slightly higher APR with no early settlement charge, than a lower APR with a penalty for paying off the loan before the end of the term.