The Annual Percentage rate or APR denotes the annual interest rate that an individual is required to pay against their loan or the amount they receive on their accounts. APR is utilized for most financial products such as personal loans, mortgage loans, credit cards, to car loans.
Individuals must have a clear understanding that it is a simple percentage that denotes the amount paid by an entity for borrowing money. It decides the borrowing costs of most credit products.
Therefore, knowing how to calculate APR and understand the process will allow borrowers to know the exact borrowing cost beforehand. Let’s take a look at what is APR and how it is calculated.
What is the annual percentage rate?
The Annual Percentage Rate or APR allows individuals to estimate the exact borrowing cost over a specific period. It is usually denoted in percentage and represents the annual cost of the loan. This financial term decides interest rate and associated fees while servicing the loan. However, while calculating APR, one must know that it does not consider compound interest rate while evaluating the exact interest payable.
Borrowers must note that the APR will always be higher or equal to the interest rate charged against a loan. APR is considered an effective tool while comparing loan terms of various lenders and helps find the right lender that suits your financial requirements.
How is APR calculated?
It is important to mention that there are two types of APR- personal and representative. Representative APR refers to the advertised yearly interest rate against their loan, while personal APR refers annual interest rate offered to the borrowers based on their eligibility and financial profile. Before knowing how to calculate APR, it is important to note that personal APR is usually higher than representative APR.
Since APR is the annual cost that includes interest payable and other associated costs of availing the loan, it provides a fair idea of the actual annual borrowing cost. It is important to calculate APR because lenders may offer a low AIR (Annual Interest Rate) but impose higher additional charges.
For this reason, it is essential to calculate APR before availing of a loan so that you are aware of the correct interest amount and get ways to avail better interest rates on your personal loan.
The following is the APR formula to help borrowers with the calculation to calculate the overall borrowing cost.
APR= [{(Fees + Interest/ Principal}/ n]*365*100
Here, “n” refers to the repayment tenor
Let’s understand it better with the following example
Suppose an individual is willing to apply for a personal loan of Rs.5 lakh with a repayment tenor of 3 years. The applicable interest rate against the loan amount is 12%, the processing fee is 1.5%, and the insurance cost is Rs.4700. The overall calculated APR is-
Processing fee- Rs.7500 and the entire fee including insurance cost is Rs.12, 200 and the interest cost is Rs.1 80, 000
APR= [{(12, 200 +1, 80, 000)/ 5, 00, 000}/ 1095]*365*100 = 12.81%
The overall cost of a loan is approximately 12.81% for the repayment tenor of 3 years and is greater than the nominal interest rate.
Thus, before knowing how to apply for a personal loan or any other credit, borrowers must calculate APR as lenders usually keep AIR lower and keep associated charges high, thereby hiding the actual borrowing cost.
Why is APR important?
As already mentioned, APR states the overall borrowing cost and helps in comparing different loan offerings. However, individuals should also consider the factors affecting personal loan interest rates.
The parameter of a good APR varies from one individual to another, and to determine it, one needs to know how to calculate APR for various lucrative offerings. When scouting for beneficial loan offers in the market, Bajaj Finserv Personal Loan stands out amongst other financial lenders as it ensures an affordable APR along with other viable offerings.
Moreover, borrowers can also avail themselves of pre-approved offers to streamline the documentation and loan application procedure. These offers are available on several financial products such as business loans, personal loans, credit cards, etc. Intending borrowers can check their pre-approved offers online by submitting their essential credentials.
Therefore, knowing how to calculate APR, individuals can assess overall borrowing cost beforehand, choose a suitable lender, and get lucrative deals. Hence, before signing a loan agreement, borrowers must confirm the APR with the respective lender.
