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What is Annual Percentage Rate (APR) and its importance in Loans

Annual percentage rate, commonly known as APR, is a number that represents the total cost of borrowing a sum of money from a lender. The term APR refers to the annual rate of interest charged by a lender from its borrowers for the amount he lend; the rate will be cited in % term on an annual basis.

As we know, interest is the time cost of the money a borrower enjoy / a lender part with. Such interest rate can be cited in different ways, like flat rate, annualized rate, reducing value, monthly rate, weekly rate, upfront, backended, etc. A borrower need rightfully to understand his actual cost of borrowings and if he/she has multiple options to borrow, he invariably need a common factor to access his cost of borrowings; so that he can compare all the available options in one parameter and take a valued call to select the best possible options available to him. Decision of selection will also be based on many subjective parameters like, security, guarantor, tenure, etc.

APR is common factor to access the cost of borrowings. APR reflect the annualized actual cost of interest payable and include the likely annualized impact of any fees / charges being charged as a part of the loaning. Given other factors being constant, lower APR mean better terms. (However as stated above, we need to consider all other subjective parameters along with APR to decide which loan proposal is better)

As you shop around for financing, it's important to understand how to calculate APRs and compare them between lenders and credit card issuers.

How is APR calculated for loans?
To calculate APR, you can follow these 5 simple steps:

  • Add total interest paid over the duration of the loan to any additional fees.
  • Divide by the amount of the loan.
  • Divide by the total number of days in the loan term.
  • Multiply by 365 to find annual rate.
  • Multiply by 100 to convert annual rate into a percentage.

APR Formula and Calculation

Using this formula you can easily calculate the APR of your loan manually through Microsoft Office Excel or Google Spreadsheet.

Does APR matters?
If you pay in full every month: APR doesn't matter, When you pay your credit card balance in full and on time in a given month, two things happen that make your interest rate irrelevant: There's no carried-over balance on which the card issuer can charge interest. You get a grace period on purchases in the next month.

Better is the credit score, the better will be APR offered.

Difference Between Interest Rate and APR
APR is the annual cost of a loan to a borrower which includes fees. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, it also includes other charges or fees such as mortgage insurance, most closing costs, discount points and loan origination fees.

Interest is typically expressed as a yearly rate known as the annual percentage rate, or APR. Though APR is expressed as an annual rate, credit card companies use it to calculate the interest charged during your monthly statement period.

An annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate as well as any other charges like mortgage broker fees, etc. that you pay to get the loan. For that reason, your APR will be usually higher than your interest rate.

How knowing your APR can help you save money?
APR is the standard of calculating the overall interest that you have to pay for a loan. As a borrower, you usually check only the interest rate on your principal amount at which you are getting the credit from the lender. But you miss to check the other applicable charges and costs such as the upfront Interest or say flat rate of interest, etc. As a result, a borrower often confuse in selecting the best available loan option and end up taking a loan which effectively costs him much higher than other available options.

This is not the case in APR. Through APR, you can calculate the actual rate of interest including all the charges levied by the lender on the borrower. Since, it will include the actual rate of interest that you will be paying during the entire loan period, you will get to know which lender is offering you the best rate. Moreover, as you will know the breakups of the rates and charges, you can ask your lender to reduce the rate of interest on your loan. So, know the APR of your loan or credit card and save a huge amount of money.

The author is Operation Head of The article written by him is in his personal capacity and educational in nature. All the views are his personal views., the peer to peer lending platform has placed (promoted) the articles to benefit the general borrowers and lenders. You may write to author for your quarries at referring the article name and your details. is India's leading RBI (Reserve Bank of India) registered NBFC-P2P, providing technology enabled e-commerce platform to it's Lenders and Borrowers to avail their loan at a highly competitive Rate of Interest, in a hassle free manner without much of documents; at the same time it provides its Lenders Higher return on their capital by providing opportunities to lend to good quality, well assessed borrowers.


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