Annual Percentage Rate

What Is Annual Percentage Rate? How Does It Work?

Annual Percentage Rate or APR is not a new word if you have borrowed a loan or used a credit card. APR helps you when deciding about choosing the best credit card or loan for yourself. Here is FinanceShed with a complete guide on what Annual Percentage Rate is all about.

What Is The Annual Percentage Rate?

Annual Percentage Rate

Source: nerdwallet.com

APR is nothing but an annualized representation of your interest rate. When you are to choose between multiple loans or credit cards, APR can help you compare how expensive a transaction will be on each one. APR can also be used to know the annual rate charged by lenders when the loan is borrowed or credit card is used. Also, APR is used to calculate the annual rate of the return earned on an investment.  

Normally APR is calculated in two different ways, they are, Nominal APR and Effective APR. The nominal APR is basically calculated as the rate, for a payment period, multiplied by the number of payment periods in a year. The effective APR is calculated as the fee + compound interest rate. This can also vary depending on whether the up-front fees, such as origination or participation fees, are added to the entire amount. If not added to the entire amount it can be treated as a short-term loan due in the first payment. The calculation of the effective APR can be called the “mathematically-true” calculation.

Though these definitions are accepted worldwide, there are varying definitions among various countries. For example, In the United States, APR is typically presented as the periodic interest rate multiplied by the number of compounding periods per year. 

The Formula For Calculating APR

APR= ((Principal Fees + Interest​​/n)×365)×100

Where Interest = Total interest paid

Principal = Basic Loan Amount

N= Number of days or period in the loan term.

This formula helps you to calculate what percentage of the principal you’ll pay per period after considering each and every expense such as monthly payments over the course of the loan, upfront fees, etc. It is calculated by multiplying the periodic interest rate by the number of periods in a year in which the periodic rate is applied.

Also Read:- New Income Tax Brackets For 2019 In Comparison With 2018

Why Go For APR Calculation?

Annual Percentage Rate

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Loans can sometimes be confusing. Lenders come up with different types of statements and quote different numbers that mean different things. Even when a lender gives you a complete understanding of the loan expenses and interest rates honestly, it is still difficult to understand which loan is the least expensive. That’s where you actually need an Annual Percentage Rate calculation. You can calculate these APRs with the use of detailed spreadsheets or you can calculate the same by just having small calculation by hand.

What Does The Annual Percentage Rate Imply?

Generally, loans are offered with fixed or variable APRs. Fixed APR loans carry the same interest rate throughout the loan tenure whereas the variable APR loan comes with an interest rate that can change anytime during the loan tenure.