What is the annual percentage rate?
The annual percentage rate (APR) is the interest rate you would pay on a loan if you took out the loan over a given period. The APR includes both the nominal interest rate and any other fees or charges associated with the loan. This means that you can compare different loans apples-to-apples by looking at their APRs.
There are a few different types of APR that you might encounter:
- Fixed APR. This is the most common type of APR. With a fixed APR, the interest rate stays the same for the life of the loan.
- Variable APR. A variable APR will change over time according to underlying index rate changes. For example, if your credit card has a variable APR and the prime rate goes up, your annual percentage rate will go up as well.
- Cash Advance APR. This is the interest rate you’ll pay on cash advances taken from your credit card. Cash advances usually have a higher APR than regular purchases, and they often come with additional fees.
- Penalty APR. A penalty APR is a higher interest rate than your credit card company might charge you if you make a late payment or go over your credit limit.
- Introductory APR. Many credit cards offer an introductory APR, which is a lower interest rate that lasts for a certain amount of time (usually six to twelve months). After the intro period expires, the regular APR will apply.
Several factors can affect the APR on a loan:
- The borrower’s credit score. The better your credit score, the lower your APR will be.
- The type of loan. Mortgages typically have a lower APR than credit cards, for example.
- The amount of the loan. The more significant the loan amount, the higher the APR will be.
- The loan term. Longer-term loans tend to have a higher APR than short-term loans.
- The use of the loan. Loans for things like cars or vacations typically have a higher APR than loans used for more practical purposes, like home repairs or education expenses.
Loans come in all shapes and sizes, and so do their annual percentage rates (APRs). Whether you’re looking to buy a new car or purchase real estate, it’s essential to be aware of the APR on each loan so that you can make a comparison of each.
To calculate the annual percentage rate on a loan, you’ll need to know:
- The amount charged in fees.
- The interest is paid over the life of the loan.
- The loan amount.
- The number of days on the loan term.
Annual percentage rate case study
Let’s say you take out a loan for $5,000 with a fee of $100 and an interest rate of 15% for two years. How would we calculate the APR on this loan?
First, let’s break down the calculation:
0.00023288 * 365 * 100% = 8.5%
Therefore, the APR is 8.5 percent.
The bottom line
In short, the annual percentage rate (APR) is the interest rate you would pay on a loan over a period of time. The APR differs from the nominal interest rate in that it includes any other fees or charges associated with the loan. This makes it a more accurate representation of the actual cost of taking out a loan.
