What does the annual percentage rate (APR) disclose to borrowers?

The annual percentage rate (APR) is a critical component in understanding the true cost of borrowing. It discloses to borrowers the total finance charges associated with the loan expressed as a yearly rate. This includes not only the interest rate on the loan but also any additional costs or fees that may be required to obtain the loan, such as loan processing fees, points, and mortgage insurance. By including all these costs, the APR provides a more comprehensive picture of what the borrower can expect to pay over the entire term of the loan, allowing for better comparisons between different loan offers.

Understanding the APR enables borrowers to evaluate various loan options more effectively, as it reflects the overall cost of financing rather than just the interest rate. This highlights the importance of APR in making informed financial decisions when borrowing.