Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) represents the annual cost of borrowing, including interest and fees, expressed as a percentage. It is a standardized way of comparing the cost of loans or credit cards. Lenders are required to disclose the APR to borrowers, providing transparency and enabling them to make informed financial decisions.
4 Key excerpts on "Annual Percentage Rate (APR)"
- Thomas Herold(Author)
- 2020(Publication Date)
- THOMAS HEROLD(Publisher)
...What is the Annual Percentage Rate (APR)? The annual percentage rate, or APR, is the actual interest rate that a loan charges each year. This single percentage number is truthfully used to represent the literal annual expense of using money over the life span of a given loan. Annual percentage rate not only covers interest charged, but can also be comprised of extra costs or fees that are attached to a given loan transaction. Credit cards and loans commonly offer differing explanations for transaction fees, the structure of their interest rates, and any late fees that are assessed. The annual percentage rate provides an easy to understand formula for expressing to borrowers the real and actual percentage number of fees and interest so that they can measure these up against the rates that other possible lenders will charge them. Annual percentage rate can include many different elements besides interest. With a nominal APR, it simply involves the rate of a given payment period multiplied out to the exact numbers of payment periods existing in a year. The effective APR is often referred to as the mathematically true rate of interest for a given year. Effective APR’s are commonly the fees charged plus the rate of compound interest. On a home mortgage, effective annual percentage rates could factor in Private Mortgage Insurance, discount points, and even processing costs. Some hidden fees do not make their ways into an effective APR number. Because of this, you should always read the fine print surrounding an APR and the costs associated with a mortgage or loan. As an example of how an effective APR can be deceptive with mortgages, the one time fees that are charged in the front of a mortgage are commonly assumed to be divided over a loan’s long repayment period. If you only utilize the loan for a short time frame, then the APR number will be thrown off by this...
eBook - ePubBusiness
The Ultimate Resource
- Bloomsbury Publishing(Author)
- 2011(Publication Date)
...Calculating Annual Percentage Rate WHAT IT MEASURES The annual percentage rate (APR) measures either the rate of interest that invested money earns in one year, or the cost of credit expressed as a yearly rate. WHY IT IS IMPORTANT It enables an investor or borrower to compare like with like. When evaluating investment alternatives, naturally it’s important to know which one will pay the greatest return. By the same token, borrowers want to know which loan alternative offers the best terms. Determining the annual percentage rate provides a direct comparison. HOW IT WORKS IN PRACTICE To calculate the annual percentage rate (APR), apply this formula: APR = [1 + i/m]m – 1.0 In the formula, i is the interest rate quoted, expressed as a decimal, and m is the number of compounding periods per year. For example, if a bank offers a 6 percent interest rate, paid quarterly, the APR would be calculated this way: APR = [1 + i/m]m – 1.0 = [1 + 0.06/4] 4 – 1.0 = [1 + 0.015] 4 – 1.0 = (1.015) 4 – 1.0 = 1.0614 – 1.0 = 0.0614 = 6.14 percent APR TRICKS OF THE TRADE • As a rule of thumb, the APR rate is slightly higher than the quoted rate. • When using the formula, be sure to express the rate as a decimal, that is, 6 percent becomes 0.06. • When expressed as the cost of credit, remember to include other costs of obtaining the credit in addition to interest, such as loan closing costs and financial fees. • APR provides an excellent basis for comparing mortgage or other loan rates; lenders are required to disclose it. • When used in the context of investment APR can also be called the “annual percentage yield,” or APY. FOR MORE INFORMATION Web Sites: Investorguide.com: www.investorguide.com Investopedia.com: www.investopedia.com The Motley Fool: www.fool.com “I finally know what distinguishes man from the other beasts: financial worries.” Jules Renard...
eBook - ePub- Geraint Howells, Christian Twigg-Flesner, Thomas Wilhelmsson(Authors)
- 2017(Publication Date)
- Routledge(Publisher)
...The borrowing rate refers to the ‘rate of interest expressed as a fixed or variable percentage applied on an annual basis to the amount of credit drawn down.’ 140 However, this may not reflect the true cost of interest if other charges are added on and it may depend upon the intervals at which the money is repaid. This is why it is important to also have the APRC which is the ‘total cost of credit’ (TCC) expressed as an annual percentage rate. 141 The ‘total cost of credit’ is defined as ‘all the costs including interest, commissions, taxes and any other kind of fees which the consumer is required to pay in connection with the credit agreement and which are known to the creditor except for notarial costs; costs in respect of ancillary services relating to the credit agreement, in particular insurance premiums, are also included if, in addition, the conclusion of a service contract is compulsory in order to obtain it on the terms and conditions marketed.’ 142 This is a fairly inclusive definition, which makes it less susceptible to manipulation than the US equivalent. 143 However, firms may prefer to raise revenue through default charges than interest, because charges for non-compliance are not included in the TCC. Given the tendency of consumers to be over-optimistic about repayment, creditors can rely on recovering some additional money by means of such default charges. The function of price disclosure is to allow consumers to make comparisons and hence promote competition, though a secondary effect may be to alert consumers to the cost of borrowing which may cause them to show restraint. 144 The 1987 Directive had left most decisions about the total charge for credit and method of calculating the APR to Member States. Obviously, it is important in a cross-border context to have this figure calculated in a consistent manner so valid comparisons can be made between prices...
eBook - ePubMultiple Interest Rate Analysis
Theory and Applications
- M. Osborne(Author)
- 2014(Publication Date)
- Palgrave Pivot(Publisher)
...What distinguishes the APR from other cost measures is that it puts the credit, its costs and time together, thus recognizing that these three elements are relevant in determining a comparable and uniform measure of the cost of the credit. In this way, the APR presents significant advantages over other measures of cost.... Compared to a simple rate,... [APR]... has in its favour the primacy of compound interest in finance and economics, a greater interpretability and a higher adaptation to situations where the amount of the credit varies, and the payments might adopt different and diverse patterns, as happens in consumer credit agreements. (Directorate General for Health and Consumer Protection (2009, p. 8) 2 It is argued below that this conventional interpretation is not entirely correct. The relative merits of the simple rate of interest and APR are most effectively compared within a single equation containing both rates of interest. To the author’s knowledge no equation containing both rates has been identified in the financial literature. The remainder of this chapter derives and analyzes such an equation. The equation demonstrates that the connection between APR and the simple rate is more subtle and powerful than conventional financial theory allows and that the simple rate of interest is a superior policy variable to APR. 4.3 A deeper analysis of APR and the FC When comparing loans of different amounts and terms, the FC normalized by loan amount and term is more meaningful than the FC alone...
