What is the annual percentage rate (APR) and how is it calculated?

APR is the annual rate charged by a bank or financial institution when you invest or take out a loan. It stands for the interest rate the lending party charges on loans it offers each year. In most cases, the APR is a percentage of the borrowed amount, and it is paid with the principal.

How does it work?
 

APR is known for serving as a good barometer for the purpose of checking the cost of a loan. So, for example, in case you are borrowing a personal loan from IDFC FIRST Bank, and you want to learn how much the loan will cost, you need to look at the APR. It is important to remember that APR is different from annual interest rates. Therefore, before applying for a loan, it is prudent on your part to not just rely on the interest rate charged annually.

That’s because it only shows you just the interest component of the loan. The annual percentage rate is known for including all other kinds of charges and therefore is considered a better way of calculating the cost incurred on a loan. However, before you learn how to calculate APR, it is also imperative to note that APRs are not a monolith. There are two different variants of APR. They are:

• Fixed APR
  
  Fixed APR can be defined as the rate of interest that you are charged and is known for remaining the same throughout the term of the loan. Whenever the APR is known for being fixed, the bank or the financial institution as a lender must notify you, the borrower of any changes made to the APR.
• Variable APR
  
  In case the APR is known for being different, it can be defined as a variable annual percentage rate. Variable APRs are known for fluctuating regularly and in that way, they are different from fixed APRs. Calculating credit card interest is an example of variable APRs.

How to calculate APR?
 

The best way to define APR is that it is the method for computing the total cost of a loan incurred in a year. Here is how it is possible for you to calculate the annual percentage rate. The APR formula is:

APR= [{(Fees + Interest)/ Principal}/ n] *365*100

The components mentioned in the formula stand for:
Interest = The total interest you are expected to pay for the loan
Principal = The loan amount you applied for
n = the number of days that are left in the loan term

Apart from using the formula to calculate manually, nowadays, it is also possible for you to use an online APR calculator on the bank’s website. Using an online calculator will help you to pay for your loan. In this method of APR calculation, all that you are required to do is enter the total loan amount you applied for, and the interest rate that’s charged. Once you filled in all the necessary details, you will be provided the APR.

What are its benefits?
 

Listed below are a few of the benefits that are associated with the annual percentage rate:

• One of the salient benefits of APR is that it is known for providing you with a good understanding of the cost of the loan. You need to compare the different loan offers just by looking at the APR and determining who is offering the most affordable loan. Since the APR is known for including all fees in a loan offer, it is known for giving a clear idea of how much you will be required to pay for the loan.
• As different banks are known for having different terms, comparing different loan offers might be difficult. That’s because it might not always be possible for you to go through all the tiny details of different loan offers available. In such cases, the APR might provide you with a standardised figure to look for among different loan providers and make the best decision.
• The APR is also known for providing you with an insight into the cost of your loan. Therefore, by looking at the APR, it is possible for you to gauge your repayment ability, and thereby plan accordingly.

So, based on the information above, it is important to look up the APR important while applying for a loan. Hence, before applying for a loan from the bank, please make sure that you have calculated the APR of the loan so that you are able to choose the best loan offer.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.