|By Jessica Malitoris on November 1, 2010
The first important question to answer is: what is APR? Any kind of loan will include an interest rate. However, the interest rate does not include additional, hidden fees, insurance requirements, or other expenses. The combination of all of these is what makes up the APR, or annual percentage rate. In the Truth in Lending Act, the government not only simplified and made visible the other payments, it created a tool which allows consumers to compare prices and financing options more accurately and easily. “0% APR” says on the surface that the car loan you’re looking for doesn’t have any of these extra fees attached to it. Unfortunately, using low or 0% APR as an advertising strategy is very common, and if you don’t look at the fine print, you are likely to end up paying more than you bargained for.
Often 0% APR is only available to those with the highest credit scores. When this is not the case, a number of little details can make 0% APR more expensive than it suggests. According to the FDIC, for some types of loans, the APR can change if the amount of money in your deposit account drops below a certain amount or if you lose your job, so it is important to make sure the loan is exactly how you want it.
As with any statistic, it is possible to misrepresent the data. Frequently, it is better for you to calculate the APR on your own, based on your own situation and needs. You can obtain free software via the US Treasury that will calculate it for you, or you can do it yourself. The “Truth in Lending” government-produced booklet is lengthy, but features specific advice on calculating APR by yourself.
As with all financial decisions, check the fine print. Even a deal advertised with “0% APR” can fool you. Tailor your loans to meet your needs, and always consult a financial advisor if you have questions.