What is APR in Finance?
APR stands for Annual Percentage Rate. It basically denotes the cost that borrower has to pay each year to the lender including the fees. This is basically expressed as a percentage, and it is considered a broader measure of the cost that the borrower has borrowed as it not only reflects the interest rate but also the fees that the applicant has to pay to get the loan sanctioned to them.
This basically gives a bottom line figure to the applicant while they are comparing between the lenders, credit cards, or other investment products.
Break down on APR – Annual Percentage RateÂ
The loan issuer explains the APR. The issuer must be able to explain to the borrower and should be clearly stated in the promissory note the APR for the particular amount of money lent out to the debtor. APR covers all the additions of the monthly interest, and it can also be calculated by multiplying the number of months in a year by the actual interest rate charged.
For example, if the interest rate charged on a particular amount of money is 1.5%, the APR should be 18%. APR can be fixed or variable depending on the type of loan and the interest rate to be charged. If the interest rate is fixed, the APR does not have to change over the year, while a variable interest rate can make the APR change anytime.
All financial institutions are required to advise the financial instruments’ APR before any agreement is signed between the lender and borrower. APR is basically a tool that provides a consistent basis for presenting annual interest information which is used to protect consumers from misleading advertisements. It basically calculated what percentage of the principal, the borrower would pay each year by taking things such as monthly payments into account. It does not take into account the compounding of interest within the year.
To calculate APR, we need the multiply the period interest rate by the number of periods in a year on which it was applied. It has to be noted that a credit card’s APR will vary based on the type of charge. The credit card issuing bank might charge one APR for purchases, another for cash advances, and yet another for doing a balance transfer from one card to another.
Banking institutions also charge higher rate penalty APRs to borrowers for late payments. Loans provided by the bank generally come with either fixed or variable APR. A fixed-rate means that the interest rate will not change during the loan tenure. Variable APR means that the interest rate will change at any time.
APR also depends on the credit score. The rate given to applicants with excellent credit scores is significantly lower than what would be offered to those with bad credit. APR only takes into consideration of the sample interest. APY takes into account the compound interest. Hence loan APY is always higher than the APR.
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