What does APR stand for, and why is it important?

APR stands for Annual Percentage Rate, and it is crucial because it measures the total yearly cost of borrowing expressed as a percentage. This includes not only the interest rate on the loan but also any associated fees or costs that the borrower might incur, making it a comprehensive tool for understanding the true cost of credit over a year.

By using the APR, consumers can effectively compare different loan offers, as it provides a standardized metric that takes into account all costs associated with borrowing money. This allows individuals to make informed financial decisions based on the overall costs rather than just focusing on the nominal interest rate, which can be misleading if fees are not considered. Understanding APR is essential in personal finance as it aids in budgeting and managing debts more effectively, ensuring borrowers are aware of what they will ultimately pay over the life of the loan.