Comparing APR - Mistakes

When you see a loan’s APR, you assume that the loan will be paid off over its entire lifetime. For example, the APR on a 30 year loan is calculated with the assumption that you’ll keep the loan for 30 years. In reality, most people do not keep their loans alive that long. 7 years or so is more like it.

If you pay off a 30 year loan after 7 years, APR will lead you down the wrong path. You’ll see lower APRs on loans with high up-front fees and lower interest rates. Unfortunately, you won’t be able to spread the up-front costs you paid over very many years.

If you pay your loan off early, the actual APR is higher than what you see quoted. APR is most useful if you plan to keep the loan forever.

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