The annual percentage rate is the total borrowing cost from any financial institution for over one year. It is one of the best ways to calculate the borrowing cost as it considers all the costs associated with borrowing. It includes charges like administrative fees, closing fees, or late fees. The annual percentage rate does not take into account any compounding effect of interest. One can use APR to compare the various costs across the lenders. To understand the concept of the annual percentage rate, one must know how to calculate APR.
Types of APR
You may find two different types of APR. One is fixed, and the other is the variable. In the case of the fixed one, the interest rate that gets applied with the principal amount does not undergo any changes. Therefore the amount is subjected to changes. Whereas, in the case of variable one, the interest rate varies. The higher rate of APR indicates that the borrower paid greater interest. Since the annual percentage rate gets calculated based on the remaining balance, therefore if one tends to pay the balance in full and on the given time, then, in that case, the authority won't consider the annual percentage rate.
Ways to calculate APR
To calculate the APR, one must utilize the following steps.
- First, you need to calculate the rate of interest
- Add the administrative fees with the amount of interest
- Divide the amount with the principal loan amount
- Divide the amount with the total number of days that are there in the loan tenor
- Multiply it by 365
- Multiply the result with hundred to convert it into a percentage
Therefore the formulation becomes:
APR=((Interest+fees/loan amount) / number of days in loan term))*365*100