An annual percentage rate (APR) is the interest that is produced from the sum that is levied to the borrowers or paid to the investors. In simple words, APR is the percentage that shows the total rate of interest over your loan tenure. APR includes all the additional costs charged by the banks or lenders, such as processing fees, prepayment fees, goods and service tax, inspection fees, upfront fees, etc. You can select the best bank or lender to obtain a loan from by looking at the annual percentage rate.
In a nutshell, an annual percentage rate is a cost that you pay for borrowing money from a lender. A loan having a high APR is something you should generally avoid, as it can cost you a lot. Comparing the annual percentage rate of different banks can help you understand which bank is the best for you to take a loan from.
Law in many countries has mandated that banks let people know about the annual percentage rate before applying for a loan. Although there is no such law in India, you can rightfully ask the lender about the APR before you apply for a personal loan. You can also calculate the APR using a simple formula.
Formula to Calculate an Annual Percentage Rate
Step 1.
Add all the additional costs you charged (processing, prepayment, inspection, etc.) to the total interest amount you have to pay over your loan tenure.
Step 2.
Divide the outcome by the principal (that is, your total loan amount).
Step 3.
Now divide this by the number of days in the loan term.
Step 4.
After this, you have to multiply the result by 365, and then again, you have to multiply it by 100.
Step 5.
The remainder you get is your annual percentage rate.
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Types of Annual Percentage Rate
There are two types of annual percentage rates- Fixed APR and Variable APR.
Fixed Annual Percentage Rate
A fixed APR is something that does not change over the loan period. Therefore, fixed APRs are the best option for taking a loan. Personal loans, secured or unsecured, are one of the most basic examples of fixed APR.
Variable Annual Percentage Rate
Variable APRs change over the loan period. There are chances of a Variable APR to fluctuate based on the prime rate. This means that a Variable annual percentage rate can increase or decrease accordingly.
Why is the Annual Percent Rate important while applying for a personal loan?
- The average rate of an APR depends on the loan amount and its tenure. It also depends on your existing debts and credit score. An APR plays a crucial role while applying for a personal loan as it decides the amount that you have to pay later. A few factors mentioned below affect your interest rate when you apply for a personal loan.
- When applying for a personal loan online, your credit score matters a lot. For example, PaySense is one of the best instant loan apps in India, and if you apply for a personal loan from this app, you are required to have a good credit score to get an instant personal loan.
- Furthermore, your monthly income and employment type also play an important role in getting a personal loan online. You are required to have a fixed monthly income to get a personal loan.
- In addition, while taking a personal loan, you also have to make sure if the APR is fixed or variable. This would help you understand the interest rate that you have to pay later.
- You must also know whether the loan you are taking is secured or unsecured. For a secured loan, you have to deposit collateral. However, you will have to maintain a good credit score for an unsecured loan.
- While getting a personal loan, you must know about your loan repayment tenure, as this would make you understand the EMIs that you will have to pay.
- Make sure to take a loan amount that is convenient for you to pay in the future. As taking a big amount can be riskier for you.
