What is Annual Percentage Rate(APR)?

The Annual Percentage Rate (APR) is a measure used in finance to represent the yearly cost of borrowing, expressed as a percentage. It includes the interest rate and any additional fees or costs associated with obtaining the l oan, such as origination fees or points. The APR provides borrowers with a standardized way to compare the true costs of different loan products, including mortgages, car loans, personal loans, and credit cards. It's important to note that the APR takes in to account both the nominal interest rate and any fees or charges associated with the loan, providing a more accurate reflection of the total cost of borrowing over the course of a year.

Difference Between APR and Interest Rate

While the interest rate rep resents the cost of borrowing as a percentage of the principal amount, the APR provides a more complete picture by incorporating additional fees and charges. Consequently, the APR is often higher than the nominal interest rate, especially for loans with va rious fees and upfront costs. The key difference between Annual Percentage Rate ( APR ) and interest rate lies in what they represent and how they are calculated.

• Interest Rate:
  This is the percentage of the principal amount (the initial sum of money borrowed) that is charged for borrowing over a certain period of time. For example, if you borrow $1,000 with a 5% annual interest rate, you'll pay $50 in interest per year.


• Annual Percentage Rate(APR):
  This includes not only the interest rate but also any additional fees or costs associated with obtaining the loan, such as origination fees, points, and other finance charges. The APR is designed to give borrowers a more comprehensiv e understanding of the total cost of borrowing over the course of a year. It's essentially the true cost of borrowing, as it reflects both the nominal interest rate and any associated fees.

APR Calculation with a simple numeric example

• Calculate the total interest paid over the two years:
  Total Interest = Principal Amount X Interest Rate X Loan Term in Years
  = $10,000 X 0.05 X 2
  = $1,000


• Add any additioanl fees to the total cost:
  Total Cost = Total Interest + Origination Fee
  = $1000 + 200
  = $1,200


• Calculate the APR using the formula:
  APR = (Total Cost / Principal Amount) × (365 / Loan Term in Days)
  
  Here, the loan term is two years,so we use 730 days.
  
  APR = ($1,200 / $10,000) × (365 / 730)
  = ($1,200 / $10,000) × 0.5
  = 0.06 or 6%
  

How to Use This Calculator

• Loan Amount:How much you plan to borrow.
• Interest Rate: This is your quoted annual interest rate the lender charges on the loan.
• Interest Compounding: If the loan requires you to pay monthly payment, select monthly. Otherwise select other options as appropriate.
• Number of Payments: Based on the loan term , you need to enter how many payments you are going to make. For example, if your loan is for 30 years with monthly payment, enter 30*12 = 360 payments.
• Payment Frequency: If the loan requires you to pay monthly payment, select monthly. Otherwise select other options as appropriate.
• Non-Financial Fees: Enter 0 if you do not have any non-financial fees.
• Financial Fees: Required fees from the lender, such as an origination fee or mortgage broker fee. Enter 0 if you do not have any financial fees.
• Prepaid Financial Fees: Enter 0 if you do not have any prepaid financial fees.