Why APR is used?

Due to transactions costs and fees, the APR is always higher than the nominal interest rate. Therefore, APR represents the "true cost" to the borrower, and is a better measure of the cost of borrowing.

Another advantage of APR is that it allows the borrower to better compare the cost of borrowing from different lenders, since they may all have different fee structures. It is quite possible that a lender may charge a higher interest rate but a lower fees. This may be a better deal than a lender charging lower interest but high upfront transaction costs.

Since APR factors these costs in, the comparisons between lenders are fair and accurate.


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