APR is an acronym (abbreviation) for “Annual Percentage Rate”.
WHY THE APR IS DIFFERENT THAN THE CONTRACT RATE:
There are two percentage rates that U.S. car dealers need to be aware of,
the Contract Rate and the Annual Percentage Rate (APR). They are not the same in the United States. The Contract Rate is used to calculate interest, and the APR is the result of a calculation.
The Contract Rate is the interest rate that the dealer, bank or finance company charges the borrower. In Simple Interest calculations, the Unpaid Balance is multiplied by the Contract Rate to determine the interest charged on a payment. The actual payment calculation looks like this:
(Contract Rate/365) X ((Unpaid Balance) X (Number of Days since Last Payment))
Subtract Interest Due from the Scheduled Payment.
Add Interest Due to Principal Due.
As you can see, the Contract Rate is used to calculate the Payment.
The APR is a different number, and the result of a calculation devised by the Federal Reserve Board to more accurately represent the true cost of a loan. The result of the APR calculation is always slightly different than the contract rate and must be plus or minus 0.125% of the Truth-In-Lending Disclosure shown on the Installment Sales Contract.
You can find APR Computations at the FDIC website:
The calculation is complicated, and requires a computer program to generate the APR.
As you can see, the APR is the result of a calculation.
Now you understand and can explain the difference between APR and Contract Rate to your customer so that they understand the Installment Sales Contract that they are about to sign. It is important for you to share this information with the customer, to prevent misunderstandings and feelings of deception. A satisfied and well informed customer will result in referrals, and years of ongoing successful relationships.