Annual Percentage Rate (APR): What is it and How to Calculate

It has been discovered that most people who fall into the problem of not being able to pay up their debts were either not informed of the need to check out the APR of loans being borrowed, or they didn't bother to check. 

Knowing the APR of the loans or credit to be borrowed, will enable you to decide and compare which one is expensive. This is more reason why you should have good knowledge of APR, before applying for credits.

The Meaning of APR

The acronym "APR" stands for Annual Percentage Rate. It is the interest that you will pay in a year to borrow money. It is the annual interest rate that is shelled out on enterprises without computation for interest compounding for the year.

It is an indicator that reports all the charges attributed to borrowing credits.

When deciding between credit cards, the annual percentage rate can help you compare how expensive a transaction will be on each one. For example, if you wish to apply for online payday loans in ON Canada, having good knowledge of APR, you can compare different offers of loans or credits, regardless of their particular conditions, and select the one with the lowest rate. 

It will enable you to choose cheaper rate loans.

Annual Percentage Rate (APR): What is it and How to Calculate

How APR Works 

It does take into account the associated expenses, the fees for cancellation or amortization, and the frequency of payments (monthly, quarterly, semi-annual). Its calculation is based on the compound interest rate and on the hypothesis that the interest obtained is reinvested at the same interest rate.

Lenders and credit card institutions are mandated to publicize their interest rates often. Also, they're required to show their APR to their customers before the agreement is reached. When the rate is high, the credit would be expensive. So, before applying for loans, it is advisable to find out the percentage fee associated with the loan.

What Determines Your APR?

Lenders use your credit score to determine a loan's fee, and it is based on your past credit history, as well as other factors.

Don't be afraid to ask questions and read the fine print about your annual percentage rate, to make sure you're getting a good deal. Ensure you apply for loans with low rates.

How to Calculate the APR

The annual percentage rate is the benchmark rate for comparing the different loan offers on the market. It thus comprises the following elements:

The base interest or nominal fee The cost of insurance Loan fees The costs of setting up and sustaining an account. The cost of valuing the property, excluding registration fees related to the transfer of ownership of the property

The methods of calculating the percentage may vary according to the financial institutions, it should be noted that certain costs are not counted in the calculation of the annual percentage rate. Examples are penalties in the event of redemption, notary fees, etc.

Here is the formula applied to calculate the percentage:

Annual Percentage Rate (APR): What is it and How to Calculate

The principal refers to the total loan amount collected, while 'n' refers to the total number of days the loan has to stay.

Types of APR

Variable APR

This type is joined to an index interest rate, like a prime rate. It solely relies upon the prime rate. 

This means that the variable rate increases as the prime rate increases and conversely.

Your loan percentage fee might be little in the initial but may increase in the future. With this, it might be hard for you to plan your monthly allocation.

Penalty APR

This type increases only when you violate any of the terms and conditions issued by your lender.

It's advisable to check out all terms and conditions available to a credit, before reaching an agreement.

Introductory Rate

This is also known as the teaser rate. This is the type used by lenders to charge new cardholders on balances for a specified time.

It can be applied to specific transactions, as well as balance transfers, cash advances, or any combination 

Cash Advance APR

This is usually used in transactions that don't have a mercy duration. Also, the cost of obtaining cash from your credit card might increase.

Why Is APR Important?

It is an indicator that reports all the charges attributed to borrowing a loan. The interest rate is intrinsically linked to the borrowing terms that each lender will offer you.

It provides a simple indicator that allows a quick comparison of the competitiveness of a financing institution.

When the annual percentage rate is high, the loan would be expensive. So, before applying for loans, it is advisable to find out the percentage fee associated with the loan.

It can help you compare how much a credit card or loan will cost.

Annual Percentage Rate (APR): What is it and How to Calculate


It is an indicator that records all the costs associated with taking out loans.
When the annual percentage rate is high, the loan would be expensive. So, before applying for loans, it is advisable to find out the interest fee associated with the loan.
Lenders use your credit score to determine a loan's percentage fee, and it is based on your past credit history, as well as other factors.
When deciding between credit cards or loans, the APR can help you compare how expensive a transaction will be on each one.
To find out the fees applied by the different financial institutions, it's recommended that you do an online simulation.

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