Annual Percentage Rate

What Does Annual Percentage Rate Mean?

The Annual Percentage Rate (APR) is a term commonly associated with mortgages, auto loans, and credit cards, referring to the annual rate that banks or financial institutions charge borrowers. APR represents the annual cost of borrowed funds as a percentage, reflecting the total cost of the loan over its entire term.

Insuranceopedia Explains Annual Percentage Rate

By law, banks and financial institutions are required to disclose the Annual Percentage Rate (APR) to customers, ensuring they have a clear understanding of the interest rates applicable to their loans and credit agreements. For borrowers, the APR is a crucial factor for comparing interest rates and fees from different lenders. It allows borrowers to assess the total cost of a loan as a percentage. For example, if a bank charges 1% interest per month, the APR would be 1% x 12 months = 12%. In mortgages, the APR may include interest charges, closing costs, and other fees required to secure the loan. With credit cards, the APR typically only covers interest charges and does not include annual fees, balance transfer fees, or other charges.

Because APR adds up the full cost of financing a vehicle, drivers with auto loans often owe more on the loan than the car is worth for the first year or two of ownership, which is the situation GAP insurance is designed to handle. The total cost of borrowing for a financed car depends on both the APR and the insurance premiums paid over the life of the loan, so it helps to look at how much GAP insurance costs alongside the loan terms before signing.