APR

APR, the annual percentage rate, expresses the true yearly cost of a loan by adding fees such as origination and guarantee charges on top of interest. An advertised rate of 3.5% often refers to interest alone, which can differ from what you actually pay.

A comparison shows why it matters. Consider a loan at 5% with no fees versus one at 4% with a 2% origination fee. The second looks cheaper on the headline rate, but once the fee is spread across the year the ranking can flip. APR is the common yardstick that lines up products with different structures.

There is one more wrinkle. Two loans with the same APR can cost different amounts depending on how often interest is compounded. When interest is added monthly and then earns interest itself, the yearly burden ends up slightly above the APR, and the figure that captures this is APY. Deposits are typically quoted in APY and loans in APR, in each case the version that looks more flattering.

So when choosing a loan, ask for the APR and the total amount repayable rather than the advertised rate. Check for items that fall outside APR, such as prepayment penalties, guarantee insurance, and stamp duty. And treat interest-free installment offers with care, since the cost may simply be baked into the price of the item.