Define Annual Percentage Rate and How it is Calculated? - Loan Trivia


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Monday 28 February 2022

Define Annual Percentage Rate and How it is Calculated?


Borrowers or investors are charged an annual percentage rate (APR) in exchange for the interest that accrues each year on the amount charged to them or paid to them. All-in-interest rates (APR) are stated as percentages, which indicate the real annual cost of money throughout the course of an investment's term. Compounding is not taken into consideration; just the transactional fees and expenditures are included. With the APR, customers have a single figure to compare, whether looking at several lenders, credit cards, or investment options.

An interest rate is represented in terms of an annual percentage rate. Considering elements like monthly payments determines how much of the principal you'll pay each year. On the other hand, APR does not consider any compounding that occurs during the year in which it is calculated.

How to Calculate APR? 

By multiplying the annual percentage rate (APR) by the number of periods in a year when the interest rate was applied, the APR is derived. Despite the fact that the rate is applied to the balance many times, it is not stated.

APR = ((Interest + Fees / Loan amount) / Number of days in loan term) x 365 x 100

Despite the wide range of APRs offered by credit card issuers, the interest rate that banks charge clients for loans. The APR is calculated by taking the prime rate and adding a modest charge known as a margin. Depending on the kind of card, the credit score of the cardholder, and how the card is used, that margin might vary. Factors affecting personal loan interest rates are income, credit score, employer’s status, history of defaults, etc.

The prime rate is subject to change depending on the state of the economy. That implies that APRs linked to the prime rate might also alter. To keep the interest rate stable, several banks provide fixed-rate credit cards. 

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