When the borrower is asking for the money, then the lender tells you about the interest rate on the loan. But that interest rate doesn’t take you into account charges. The account charges that are related to the loan that is added to your loan amount. Usually, the actual interest rate on the loan will take quite higher than the interest rate that the lender will ask you.
The APR which stands for annual percentage rate gives you a better idea of the actual interest rate on your loan. It is compulsory for the lenders to legally update you with the original amount of interest rate that is on the loan they have provided you. There are two ways of looking for the interest rate and those are Interest Rate Before Costs and Interest Rate Including Most Costs.
Interest Rate Before Costs
Imagine that you have borrowed about $1,000 for the time period of one year. The interest rate that is nominal is the 8 percent per year that you have to pay and it is with no principal repayments throughout the year, You have to pay off the loan before the year ends. The cost that you have to pay for the loan in the year is equal to .08 times $1,000, or $80.
Interest Rate Including Most Costs
When you take out a loan from the lender, there are costs that are shown are beyond the interest rate. These must be disclosed for the lender to comply with the federal Truth-in-Lending Act.
According to the Nolo website, loan costs may include a loan contains some fee such as origination fee, mortgage broker fee, discount fee, tax/flood service fees for the life of the loan, premiums for mandatory credit life or disability insurance, assumption fee, mandatory mortgage insurance premiums, lock or commitment fees, lender’s attorney fees, application fees, and settlement or closing fees.
You have to know that charges that are added on the loan are $60 then the loan cost for the first year is $140. When it comes to APR, it includes those costs in the calculation of interest, which is 14 percent (140 divided by 1,000).