The annual percentage rate (APR) is a ratio that reflects the total cost of borrowing in one year, including the interest rate and various additional fees that may be associated with the loan. APR provides a more complete and accurate picture of how expensive a loan is than looking at interest rates alone.
APR is calculated by taking into account the interest rate and any additional fees associated with the loan. This includes administration fees, closing costs, and other fees the lender may charge. By involving all cost elements, APR provides a holistic view of how expensive a loan will be in a year.
APR is usually expressed as a percentage and is used by consumers to compare different loan offers from lenders. The lower the APR, the lower the total cost of the loan. Therefore, consumers can use the APR as a guide to choosing the most economical loan.
Annual percentage rate can be calculated using the following formula:
APR = (((I + F) : P) : loan term (days)) x 365 x 100 (%)
Note:
I = interest/interest rate
F = fees or other costs (administration, insurance, etc.)
P = principal amount/principal value of the loan
The formula above involves the total cost of the loan, including interest rates, administration fees, closing costs, and other fees. The amount of payments in one year can be calculated by multiplying the amount of monthly payments by the number of months in one year.
Examples of annual percentage rate (APR) usage in sentences
“When you consider a loan, pay attention not only to the interest rate but also to the annual percentage rate (APR) to get a more accurate picture of the total cost of the loan.”
“The APR can include hidden costs, such as administrative fees and closing costs, that affect the overall amount you have to pay over the life of the loan.”
“For example, if you are comparing two loans with the same interest rate, choose the one with the lower APR because that indicates the additional costs are more affordable.”
Source:
https://www.ocbc.id/id/article/2023/06/20/annual-percentage-rate
