This is the most difficult concept to explain in few words.
Make sure you've already reviewed the note so they see the note rate.
Have the itemization handy so you can pull the number from the itemization and show the short list of fees deducted to yield the amount financed.
Then, I say that "the amount financed is 'the non-fee-related borrowing' and the finance cost is the interest on the full note amount. Therefore the APR usually increases because you are showing 100% of the interest cost against less than 100% of the borrowed amount. This helps borrowers compare loans. A high-cost loan's APR would rise more than a lower-cost loan." |
