What is the difference between interest rates and AAPR?

October 10, 2020
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An Average Annual Percentage Rate, also known as a comparison rate, is a percentage that expresses the true cost of a loan. It helps people to identify which loan will best suit their financial circumstances and is an important consideration when deciding on a loan.

It shouldn’t be confused with the interest rate

While some may confuse the AAPR and interest rate, they are not the same.  A lack of understanding between the two could mean the difference of thousands of dollars over the course of your loan.

An interest rate is what you will initially see when comparing loans, but it does not reveal the true costs of a loan like the AAPR. By law, lenders must disclose the AAPR rate to help consumers who are comparing loans. It ensures that lenders are held accountable on any fees and charges that come with the loan, instead of luring consumers in with an interest rate that appears too good to be true.

What is included in the AAPR rate?

The AAPR is the full cost of what you will be paying for over the period of a loan term. This is why people should not only look at the interest rate when comparing loans but pay attention to the AAPR rate to know the true cost of the loan. The AAPR includes fees and charges such as:

  • Monthly account fee
  • Establishment fee
  • Mortgage documentation fee (if you take out a home loan)
  • Settlement fee
  • Annual fee
  • Interest rate

Savvy CEO Bill Tsouvalas advises borrowers to constantly revise their loan’s interest rate.

“That involves getting in touch with your broker, outlining the current fees and charges and interest rate and then your broker will compare the market. From there they can ascertain whether you should stay on the plan you’re on or put it into a new loan with better rates,” he said.

Couple look at their home loan and interest rates

Features can affect your AAPR

It is always a good idea to sit down and calculate the cost of a loan before signing any agreements. Consumers are given the option to choose the features that come with their loans to suit their needs. These features can include introductory or bonus interest rate periods, redraw facilities, offset accounts and repayment holidays. However, such benefits can carry extra fees and charges that can affect your AAPR.

When deciding which option to choose, it is important that you weigh up the costs and benefits of each loan and determine whether these features are worth paying for.

Understanding the true cost of a loan is important when deciding which one is most suitable for your needs. Consult with a broker prior to signing to help you better understand the AAPR rate and how this affects your loan.

Author bio

Bill Tsouvalas is founder and managing director at Savvy. He has a been working in the mortgage, vehicle & asset finance business for over a decade. He also writes articles on mortgage, finance, insurance and consumer protection related topics.

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