There is a lot of lingo out there around home loans. If you’ve been looking at home loans, you’ve likely seen the words “APR” which stands for annual percentage rate. This is relatively similar to the APR that you often see advertised for credit cards or other credit products. The key thing to understand is that APR is not the same as the interest rate of the loan, and it can be an important key factor when you choose your home loan. Join us here at Masii.com as we take you through the key differences:
How is APR different from interest rate?
APR is different from the interest rate. The interest rate is simply the percentage of total that you pay to borrow money toward the home. This percentage does not include any fees or additional charges that go together with the loan. Your interest rate will vary based on the duration of the loan (how many years you choose to pay it back), and also your credit worthiness and history.
The APR reflects the “true cost” of the home loan by including most of the costs and fees that are usually levied upfront by the lender. This includes fees for closing, points toward the interest rate, or any other costs.
Because the APR includes other fees, the APR is always higher than the loan interest rate because it includes everything else inside, including the interest rate. It gives a more holistic view on the total price you’re paying to borrow money from the bank.
Why it really matters
Today there are two banks in Thailand that advertise their loans with two different interest rates. Bank one offers a home loan at 3.8% and bank two offers a home loan at 4%. Which one will you choose? Not so fast!
Lenders often advertise different interest rates, but fail to mention that the APR is dramatically different. When Masii.com looks closer, bank one includes much higher fees and closing costs to obtain the loan – making the APR closer to 4.3%. The home loan from bank two has almost no additional fees, and shows an APR of just over 4%. The difference between 4% and 4.2% over a long period of time (30 years) can be hundreds of thousands of baht – that’s a car you’ve just saved!
But wait, is APR always as advertised?
One thing we have observed is that despite having a highly attractive APR in the advertisement, the real annual rate will turn out to be different. The main reason for this differential is due to different credit risks of the customer. Banks use advanced algorithms to determine how likely you are to pay back the loan, and how likely you are to default. They may be right or wrong, but it’s important to arm yourself with information before choosing a loan. Masii.com sees over 60,000 applications for bank credit every month, and has developed a highly detailed method for helping you figure out your likelihood of getting approved and your approximate “actual” rate. Let us help you today.