# APR

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## Annual Percentage Rate

The cost of funds or interest rate for an entire year expressed as a single percentage. Significantly, the APR does not account for compounding. For example, if the APR is 36%, the percentage is 3% per month, but the interest rate or cost of funds for the entire year may be greater than 36% due to the effects of compounding. By law, a credit card company or other lender must inform the customer of the APR before any agreement is signed. The APR provides the customer with a convenient number against which to compare the cost of funds for other loans or investments. It is less commonly called the annual rate of return or the nominal annual rate.

## Annual percentage rate (APR).

A loan's annual percentage rate, or APR, is what credit costs you each year, expressed as a percentage of the loan amount.

The APR, which is usually higher than the nominal, or named, rate you're quoted for a loan, includes most of a loan's up-front fees as well as the annual interest rate.

You should use APR, which is a more accurate picture of the cost of borrowing than the interest rate alone, to compare various loans you're considering.

## APR

the ‘annualized percentage rate of INTEREST’ charged on a LOAN. The APR rate will depend on the total ‘charge for credit’ applied by the lender and will be influenced by such factors as the general level of INTEREST RATES, and the nature and duration of the loan.

Where lenders relate total interest charges on INSTALMENT CREDIT loans to the original amount borrowed, this can give a misleading impression of the interest rate being charged, for as borrowers make monthly or weekly repayments on the loan they are reducing the amount borrowed, and interest charges should be related to the lower average amount owed. For example, if someone borrows £1,000 for one year with a total credit charge of £200 the ‘simple interest’ charge on the original loan is 20%. However, if the loan terms provide for monthly repayments of £100, then at the end of the first month the borrower would have repaid a proportion of the original £1,000 borrowed and by the end of the second month would have repaid a further proportion of the original loan, etc. In effect, therefore, the borrower does not borrow £1,000 for one whole year but much less than this over the year on average as he or she repays parts of the outstanding loan. If the total credit charge of £200 were related to this much smaller average amount borrowed to show the ‘annualized’ percentage rate' then this credit charge would be nearer 40% than the 20% quoted.

To make clear to the borrower the actual charge for credit and the ‘true’ rate of interest the CONSUMER CREDIT ACT 1974 requires lenders to publish both rates to potential borrowers.

## APR

the ‘annualized percentage rate of INTEREST’ charged on a LOAN. The APR rate will depend on the total ‘charge for credit’ applied by the lender and will be influenced by such factors as the general level of INTEREST RATES, and the nature and duration of the loan.

Where lenders relate total interest charges on INSTALMENT CREDIT loans to the original amount borrowed, this can give a misleading impression of the interest rate being charged, for as borrowers make monthly or weekly repayments on the loan, they are reducing the amount borrowed, and interest charges should be related to the lower average amount owed. For example, if someone borrows £1,000 for one year with a total credit charge of £200, the ‘simple interest’ charge on the original loan is 20%. However, if the loan terms provide for monthly repayments of £100, then at the end of the first month the borrower would have repaid a proportion of the original £1,000 borrowed and by the end of the second month would have repaid a further proportion of the original loan, etc. In effect, therefore, the borrower does not borrow £1,000 for one whole year but much less than this over the year on average, as he or she repays part of the outstanding loan. If the total credit charge of £200 were related to this much smaller average amount borrowed to show the ‘annualized percentage rate’, then this credit charge would be nearer 40% than the 20% quoted.

To make clear to the borrower the actual charge for credit and the ‘true’ rate of interest, the CONSUMER CREDIT ACT 1974 requires lenders to publish both rates to potential borrowers.

## APR

See annual percentage rate.

## APR

See Annual Percentage Rate.

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