What is APR (Annual Percentage Rate)?
The term APR, or annual percentage rate is an important term to understand when you’re applying for a personal loan. Understanding how it’s calculated and applied can help you make informed decisions when you need to borrow money. The annual percentage rate or APR is the amount of interest expressed as a yearly rate. Interest includes fees, such as an origination fee. “As a consumer, you may be able to obtain a low APR by building and establishing good credit. This page will help you understand how an APR works on a loan and how you can calculate APR.
How to Calculate APR (Annual Percentage Rate)
Calculating APR is simple. You’ll need a few numbers to get started: Loan amount, fees, interest paid over the life of the loan and the number of days in the loan term.
Once you have this information, follow these four simple steps.
To help illustrate, let’s calculate the APR on a $10,000 loan with a total charge of $4,000 (which includes interest over the life of the loan and the origination fee). And, let’s assume the loan term is 5 years or 1,825 days.
|Steps to Calculating APR on a Loan|
|Step 1||Divide the finance charge by the loan amount.||$4,000 / $10,000 = 0.4|
|Step 2||Multiply the result by the number of days in the year.||0.4 x 365 days = 146|
|Step 3||Divide the total by the term of the loan.||146 / 1,825 days = 0.08|
|Step 4||Multiply the result by 100 and add a percentage sign.||0.08 x 100 = 8% APR|
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APR vs Interest Rates
An APR is an annual cost you’ll pay on a loan including the origination fee. An interest rate is the cost of borrowing the principal loan amount and can be variable or fixed depending on the type of the loan. While both are expressed as percentage rates, the APR is the true cost of credit and includes applicable fees.
Personal Loan APR
With a personal loan, the APR is a rate of interest expressed as a yearly percentage for the duration of the loan including the origination fee. A personal loan APR is fixed which means your interest rate won’t change over the term of the loan, and you pay the loan back in equal, monthly installments. This differs from credit card issuers that calculate APR using an index rate such as the prime rate, which can be variable or the London Interbank Offered Rate (LIBOR). A variable interest rate on a credit card could cause your interest rate to change — making your monthly payment harder to predict.