The problem is that banks and financial institutions are not eager to inform customers directly about the fees associated with their products. This is where APR, or the Annual Percentage Rate, comes in. As it turns out, it differs significantly from the loan costs that banks tell us about in advertisements or leaflets.
What makes up the cost of a loan?
In loan advertisements and offers, the interest rate is the first thing that catches the eye—of course, this means the annual interest rate, which takes interest costs into account. Unfortunately, these are not the only fees associated with a loan. If we want to find out exactly how much we will pay for a given financial product, we must look at the APR, as this indicator includes, in addition to the annual interest rate, the other fees associated with the loan, including:
- interest
- loan origination commissions
- insurance
- fees for other services
- application processing fee.
Why is APR so important?
Every bank is legally required to inform customers about the total cost of the obligation they are undertaking. Unfortunately, in advertisements and leaflets, the annual interest rate is the first thing that catches the eye—for example, 10%. The APR must of course appear in the advertisement, but it is carefully concealed; most often, the information can be found in a corner, printed in small type. So why are banks so eager to hide this information?
The reason seems fairly obvious—the advertisement remains an advertisement and is intended to encourage a potential customer to use a particular service or buy a product. This is precisely where the problem arises, because information about the APR can quickly disprove the claim that a given loan is the cheapest on the market.
Banks charge fees for virtually every additional service connected with an issued loan, so it is hardly surprising that they are not eager to publicize such practices. That is why the first thing we should pay attention to is the APR, which literally takes all the costs associated with a given loan into account.
You can calculate the actual cost of a cash loan here.
Does a lower APR always mean a cheaper loan?
In theory, that is how it should work, but banking products are characterized by a certain relativity. Everything depends on which installments we choose—fixed or decreasing—and when we repay the loan. In the overall calculation, it may therefore happen that a more expensive loan has a lower APR because most of its costs are incurred at the beginning.
The APR is intended only to give us a general view of what a bank's offer looks like and to help us take into account the costs related to banking procedures. However, we must remember that every offer should be carefully analyzed and that we should calculate exactly how much we will have to pay for our loan.