Though
APRs is used to compare loans and determine the least
expensive credit products, APR is also confusing at
time. Because each lender may calculate APRs in a different
way. Therefore, a loan with a lower APR may not necessarily
be less costly than one with a higher APR. Lenders have
some flexibility when it comes to calculating APRs.
Along with fulfilling the requirements of law, they
can underestimate the annual percentage rate of a loan
by as much as 1/8 of a percentage point. For loans that
are considered irregular, lenders may underestimate
APRs by as much as 1/4 of a percentage point.
At time, various hidden fees are included in an APR
to make APR more confusing. Such fees vary and depend
upon the loan, credit product obtained. Points; prepaid
interest; private mortgage insurance; and fees for loan
processing, document preparation, and underwriting are
commonly included in an APR. Sometimes loan application
fees and credit-life insurance costs are included as
well.
Cheap APR Loan
As the acronym APR itself describes, cheap APR means
cheap or low annual percentage rate or lower annual
cost to for the borrower. This low APR translates into
lower installments for the borrower. Usually, lenders
advertise their low APR schemes, which can be useful
for you but be careful while choosing any lender because
at time rates may be deceptive.
Cheap loan lenders calculate their APR through a system
called risk based pricing. This means that they assess
each individual's circumstances and credit record before
deciding what rate to be offered. If the profile of
the borrower is excellent and has a record of timely
payments, he will be offered a low APR.
However, you must see if any hidden cost is included
in the cheap loan which is not being reflected or is
not in your knowledge. One such example is prepayment
penalty, which means if you clear off your debt before
the decided period; lenders charge a penalty in terms
of certain percentage of the loan amount.
However, there are other factors to consider when making
a loan application, such as acceptance criteria, price
for risk and redemption penalties. It doesn't matter
how cheap a loan is if your application is declined
because you don't fit the lender's criteria.
Is a low APR always cheaper
‘NO’, you must compare the cost of different
loan offers before deciding any particular offer. Just
because a loan has a low APR or lower monthly payments
it doesn't mean that it's the cheapest or best loan
for you.
Before taking final decision, consider few
common aspects, which are:
If a lower APR loan comes with pre payment penalty,
it may not actually be a lower APR loan. So weigh up
your options as you may find it better to opt for a
slightly higher APR with no early settlement charge,
than a lower APR with a penalty for paying off the loan
before the end of the term.
At time, cost of payment protection insurance and benefits
offered by it varies from lender to lender, which add
to cost to the total loan. In this case, even if you
get a lower APR, total cost may actually be more than
what is visible to eyes.
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