Calculating APR Percentages - It Doesn't Have to Be Hard
Knowing how to calculate APR can be beneficial in finding the right bank and obtaining the loan that best meets your financial needs.
What is APR?
APR or annual percentage rate is the amount of interest you’ll pay on a loan over the course of a year. Many people mistakenly believe that the bank’s interest rate is also the APR. These are two different figures. The APR is how much the loan is actually going to cost you not only in interest charges but additional fees as well.
What is the Difference between APR and Interest Rate?
Let’s say you’re about to take out a loan to buy a car that costs $10,000. The bank is charging an interest rate of six percent. This means that you will pay six percent of $10,000 in interest. The interest rate is added to the original $10,000, which is known as the principal amount. However, most loans come with fees.
These fees may be charges for credit reports, application fees, loan processing fees, among others. All of these fees are added with the interest you’re paying on the loan. The total of these fees are interest is what makes up your APR.
Why APR Must Be Listed on a Loan
By law, banks, credit card companies and lending institutions must visibly show what your APR will be. The reason for this law is to prevent lenders from not disclosing the total of all the fees that will be charged with the loan.
Consumers often see a low interest rate and don’t realize that there are additional fees attached to the loan. Another reason for disclosing the APR is so consumers can easily compare one product or lender from another and know which one is offering the best deal.
How APR is Calculated
APR is based on the principle that you, as the consumer, will take a certain number of years to pay off the loan. It’s assumed that you may even take longer. For instance, if you borrow $10,000 on 3-year loan, the APR is figured based on the interest and fees being spread out over three years. If you pay the loan off early, the APR is going to be different.
Let’s say the bank is charging you seven percent interest on a 3-year loan and charging you $500 in additional fees. Your interest rate is seven percent but your APR is going to be almost 10.6 percent once the interest and fees are included. Learning how to calculate APR can be a very valuable took for consumers.
The APR of a mortgage is typically going to be higher than on a person loan even though the initial interest rate may be higher. One reason is because the fees and additional charges are generally higher. Another reason is because mortgage loans are spread out over a longer period of time.