Annual Percentage Rate (APR)

Definition:

The Annual Percentage Rate (APR) is the yearly interest rate charged for borrowing or earned through an investment, expressed as a percentage. APR includes both the nominal interest rate and any additional fees or costs associated with the loan or credit. It is a standard way of comparing different loan offers because it reflects the total cost of borrowing over a year.

Example:

If you borrow $10,000 at an interest rate of 5% for a year, and there are additional fees of $200, the APR would include both the interest and the fees, giving you a clearer picture of the true cost of the loan.

• Loan Amount: $10,000

• Interest Rate: 5% annually

• Fees: $200

In this case, the APR will be higher than 5% because it includes the $200 in fees, which would be factored into the overall cost of the loan.

Formula to Calculate APR:

To calculate APR, use the following formula:

APR = [(Interest + Fees) / Loan Amount] × (365 / Loan Term in Days) × 100

Where:

• Interest = The amount of interest paid on the loan.

• Fees = Any additional fees associated with the loan (e.g., origination fees, processing fees).

• Loan Amount = The principal or amount borrowed.

• Loan Term in Days = The number of days in the loan term.

Why APR is Important:

• Transparency: APR provides a clearer picture of the cost of a loan by including both the interest rate and any fees, which makes it easier to compare different loan offers.

• Comparison Tool: When comparing loans or credit cards, the APR is an important metric because it represents the total cost of borrowing.

• Understanding Total Costs: By considering APR, borrowers can see beyond just the interest rate and understand the full cost, helping them make more informed decisions.

Key Takeaways:

• APR includes both interest and fees associated with borrowing, which helps you compare different loans and credit offers.

• It reflects the total yearly cost of borrowing, including any additional charges.

• APR is especially useful when comparing loans of different terms, as it standardizes the cost across various offers.