APR stands for Annual Percentage Rate. It basically denotes the cost that borrower has to pay each year to the lender including the fess. This is basically expressed as a percentage and it is considered as broader measure of the cost that the borrower has borrowed as it not only reflects the interest rate but also the fees that the applicant has to pay to get the loan sanctioned to them. This basically gives a bottom line figure to the applicant while they are comparing between the lenders, credit cards or the other investment products.
All financial institutions are required to advise the financial instruments’ APR before any agreement is signed between lender and borrower. APR is basically tool which provides consistent basis for presenting annual interest information which is used to protect consumers from the misleading advertisement. It basically calculated what percentage of the principal, the borrower would pay each year by taking things such as monthly payments into account. It does not take into the account the compounding of interest with in the year.
How to calculate APR?
To calculate APR, we need the multiply the period interest rate with the number of periods in a year on which it was applied. It has to be noted that credit card’s APR will vary based on the type of charge. The credit card issuing bank might charge one APR for purchases, another for cash advances and yet another for doing balance transfer from one card to another. Banking institution also charge higher rate penalty APRs to the borrowers for the late payments. Loans provide by the bank generally comes with either fixed or variable APR. At fixed rate means that the interest rate will not change during the loan tenure. Variable APR means that interest rate will change at any time.
APR also depends on the credit score. The rate given to applicant with excellent credit score is significantly lower than what would be offered to those with bad credit. APR only takes into consideration of the sample interest. APY takes into account of the compound interest .Hence loans APY is always higher the APR.