CUTTING CREDIT COSTS Annual Percentage Rates, Annual $ Percentage Yields, and Finance Charges Whether you are borrow- Annual Percentage Rate (APR) • compare loans with the same loan ing money to make a large APR is the cost of credit on a yearly conditions (i.e., loan amount, repay- purchase or depositing your basis expressed as a percentage rate ment period, and interest rate); • ask the lender for a list of the money in a financial institution (e.g., 18 percent or 8.5 percent). The APR is usually slightly higher than the stated fees to be included in the APR so you can make money (e.g., or advertised interest rate on closed-end calculation; savings account, certificate of loans (e.g., mortgages and car loans) • ask for a good-faith estimate when deposit), you will need a basic because the following additional fees looking for a home mortgage. Keep understanding of some key fi- that may be required by the lender must in mind that this is an estimate and nancial terms: annual percent- be included in the APR calculation: the final numbers may change. age rate, annual percentage • credit life insurance yield, and finance charges. • discount points Annual Percentage Yield (APY) • document preparation fee This is the annual rate of interest plus the • loan application fee effect of compounding on the interest • loan processing fee earned. This is the number quoted when • origination points banks and other financial institutions try • prepaid interest to get you to deposit money in savings • private mortgage insurance accounts or buy certificates of deposit. • underwriting fee In these cases, you are the lender, so the higher the APY, the more money you will Example make from amounts on deposit. 15-year mortgage Advertised fixed interest rate = 8% Example APR = 8.20% 8-month CD Interest rate = 4.65% However, for credit cards, which are APY = 4.75% open-ended loans (i.e., the amount bor- rowed each month varies), the APR and Finance Charge yearly interest rate are the same. This is the total amount of interest and other fees you paid to borrow money. The Federal Truth in Lending Act On closed-end loans, the amount of requires lenders to provide APRs so finance charge is stated on the con- borrowers have a tool to quickly com- tract. On open-ended loans, such as pare the cost of loans. However, as with a credit card, the finance charge is any tools, users must know how to use listed on each monthly statement. See them for their project or situation to get the example below to see how finance the best end product. When comparing charges affect credit card accounts APRs on closed-end loans, with varying rates. College of Agricultural Sciences Agricultural Research and Cooperative Extension Prepared by Cathy F. Bowen, associate Credit card balance: $1,000 professor of agriculture and extension Assumptions: No additional charges will be made until the current balance is education. paid in full. Monthly payments will be paid by the due date. Visit Penn State’s College of Agricultural Sciences on the Web: www.cas.psu.edu APR: 14% Monthly payment amount $30.00 $100.00 Penn State College of Agricultural Sciences research, extension, and resident education Number of months to repay 43 11 programs are funded in part by Pennsylvania Total finance charge $273.74 $69.50 counties, the Commonwealth of Pennsylvania, and the U.S. Department of Agriculture. APR: 18% This publication is available from the Publica- Monthly payment amount $30.00 $100.00 tions Distribution Center, The Pennsylvania State University, 112 Agricultural Administration Building, Number of months to repay 47 11 University Park, PA 16802. For information tele- Total finance charge $396.67 $91.57 phone 814- 865-6713. This publication is available in alternative media on request. 5. When you leave money in a savings General Rules for Borrowing/ The Pennsylvania State University is committed to Lending Money account or certificate of deposit, you the policy that all persons shall have equal access 1. The higher the APR, the more the are making a loan to the financial to programs, facilities, admission, and employ- ment without regard to personal characteristics credit will cost. institution. The interest you earn is not related to ability, performance, or qualifications 2. The longer the loan repayment your loan fee. as determined by University policy or by state or period, the more interest you will pay. 6. The more frequent the compound- federal authorities. It is the policy of the University to maintain an academic and work environment 3. Compare at least three lenders for ing period (semiannual, quarterly, free of discrimination, including harassment. The the loan you need before making a monthly), the more interest you will Pennsylvania State University prohibits discrimina- tion and harassment against any person because decision. earn on a savings deposit. of age, ancestry, color, disability or handicap, 4. When you are the borrower, look for 7. When you are the lender, look for the national origin, race, religious creed, sex, sexual the lowest APR. highest APY. orientation, gender identity, or veteran status. Dis- crimination or harassment against faculty, staff, or students will not be tolerated at The Pennsylvania State University. Direct all inquiries regarding the Annual Percentage Rate (APR) Annual Percentage Yield (APY) nondiscrimination policy to the Affirmative Action Director, The Pennsylvania State University, 328 The cost of borrowing money The annual rate of interest plus Boucke Building, University Park, PA 16802-5901; expressed as a percentage rate compounding paid to you on Tel 814-865-4700/V, 814-863-1150/TTY. per year. deposits that you have in financial © The Pennsylvania State University 2008 institutions. Produced by Ag Communications and Marketing Used when you borrow money. Used when you have deposit money CODE # UI392 Rev5M04/08mpc4216 in savings accounts or buy certificates of deposit The lower the APR, the lower your The higher the APY, the more money credit costs. you make..