Why APR Doesn't Tell You Everything
The Truth in Lending Act requires lenders to calculate a loan's annual percentage rate (APR) when they quote a rate to customers. The APR is basically the cost of money borrowed expressed as an annual rate. It was conceived as a way for a potential borrower to see how one loan compared to another.
Take a very close look at the APR and how it's presented on a proposed loan. When comparing loans, make sure the terms are identical — length of loan and precisely whether it's a fixed-rate, adjustable-rate, or balloon loan. You must compare apples to apples.
In reality, the APR is little more than a guideline. Why? Because people rarely keep a particular loan to term; they might refinance, or they might pay it off early. That actually does affect the true annual cost of what you borrow. Also, and this point is discussed in more detail in the following section, settlement costs — all those fees mentioned previously — have a way of “adjusting” between the initial good faith estimate (GFE) that the government requires the lender to disclose and what you'll finally pay.
