Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under truth in-lending laws, the creditor must tell you-in writing and before you sign any agreement-the finance charge and the annual percentage rate (APR).The finance charge is the total dollar amount you pay to use credit. It includes interest fees, as well as service charges and some credit-related insurance premiums. For example, borrowing $100 for a year might cost you $10 in interest. If there was also a service charge of $1, the finance charge would be $11.
The annual percentage rate is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it.Again, suppose you borrow $100 for one year and pay a finance charge of$10. If you can keep the entire $100 for the whole year and then pay back $110 at the end of the year, you are paying an APR of 10 percent. But, if you repay the $100 and finance charge (a total of $110) in twelve monthly installments, you don't really get to use $100 for the whole year. In fact, you get to use less and less of that $100 each month. In this case, the $10 charge for credit amounts to an APR of 18 percent.
All creditors-banks, stores, car dealers, credit card companies, finance companies, etc.-must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure so that you can compare credit costs. The law says there are two pieces of information that must be shown to you before you sign a credit contract or use a credit card-the finance charge and the APR.
