APR or an annual percentage rate on a loan is the real cost of borrowing. It is the amount you pay each year and is shown as a percentage of the loan balance. If you have a loan of APR 10%, you will pay $100 each year for a $1,000 loan amount. It is important to understand that APR is not the interest rate. APR includes all costs and fees in addition to the interest amount. Hence, APR gives an efficient measure of the cost of borrowing. With all things equal, the loan that has the lowest APR will be the least expensive. APR might not be perfect but calculating the apr will give you a helpful starting point in comparing interest rates and fees from different lenders. You will be able to make the right borrowing decision by understanding and comparing APR.
The APR on your loan includes fees and interest charges which are converted to an annualized cost. Never assume that the lender with the lowest interest rate is an ideal option for you. Calculate APR and then make a decision. Some lenders only quote the interest rate without specifying anything about the fees, while many other list all costs upfront. Even with honest lenders, it can be difficult to tell which loan is the least expensive. Hence, APR will allow you to compare the loan products and then make the final call.
APR vs. APY
A lot of borrowers do not understand the difference between APR and APY. An APY is the annual percentage yield which is associated with deposit accounts. It is the rate that shows the total amount of interest paid on the account. The difference between an APR and APY is that APY considers compound interest and APR doesn’t.
Calculation of APR
Calculating the apr can be done manually or through a spreadsheet. However, the calculation is not easy and gets complex in case of certain loans like a mortgage loan. Using an APR calculator will make the job easier and simple for you. The calculator is available online for free.
In order to calculate the APR, you need three details- loan amount, tenure, and the fees. Once you get this information, you can use the calculator to get the APR details and make a quick comparison between loan products and different lenders. You need to add the loaned fees to the calculation.
How to use the online calculator
An online calculator for APR is simple and efficient. It is free and available on most lender’s websites. Once you input the information, you will get an answer within no time. You need to provide the loan amount, interest rate, tenure, and application fees. If you are using the lender’s calculator, the interest rate will be automatically taken by the calculator depending on the type of loan you choose. Once you provide the details, enter “Calculate” and you will get the APR within a fraction of seconds.
Loan calculator definitions
- Loan amount is the amount you are borrowing from the lender.
- Interest rate is the percentage applicable on the loan. Do not use APR here, only use the interest rate offered by the lender on the loan.
- Application fee is the cost a lender incurs to check your credit score and process the application.
- Origination fee is the amount charged by the lender as an upfront cost for the purpose of processing, issuing and underwriting the loan.
- Loan term is the tenure of the loan. For short term loans, you might have to express in months.
- Servicing charge is the monthly fee to service the loan. It is applicable towards the ongoing lender costs.
Benefits of using an online calculator
There are several benefits of using an online calculator to estimate the APR.
- Accurate: If you try to calculate the APR manually, you could make an error and the answer will be different. Even a minor error in the calculation can change the result significantly. A calculator, on the other hand, can make the task much easier and quicker.
- Ease of comparison: The biggest advantage of using an online calculator is that you can change the inputs until you reach an optimal output. This facilitates a comparison between different loan options and between different lenders. If you think that the APR of one lender is too high, you can change the loan amount or interest rate and see the difference. Comparison becomes easier.
- Make the right financial decision: Using an online calculator for APR will allow you to compare different loan products and make the right financial decision. You will be able to choose a lender and a loan product that has the lowest interest rate and minimal fees.
Before you sign on the loan documents, use the online calculator to get an insight into the APR on your loan.