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What is APR in finance

What is APR in finance

What is APR in Finance is the Annual Percentage Rate. APR represents the total annual rate charged on money borrowed money to start a business. This is always in percentage which expresses the total interest rate charged annually.

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It varies from time depending because the interest rate or additional money charged for the loan transaction to take place also varies. It also depends on the default charge; the charge on late penalties.

Break down on APR annual percentage rate 

The APR is explained by the loan issuer. The issuer must be able to explain to the borrower and should be clearly stated in the promissory note the APR for the particular amount of money lent out to the debtor. APR covers all the additions of the monthly interests and it can also be calculated by multiply the number of months in a year by the actual interest rate charged.

what is APR in finance

For example, if the interest rate charged on a particular amount of money is 1.5%, the APR should be 18%. APR can be fixed or variable depending on the type of loan and interest rate to be charged. If the interest rate is fixed, the APR does not have to change over the year while a variable interest rate can make the APR to change anytime.

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Disadvantages of APR

  • APR takes other cost in procuring the loan with it apart from the nominal or annual interest which is supposed to be paid, it had other cost which made it to be more than the actual amount to be paid for borrowing the money. For example, a monthly interest is 1.5% which is supposed to be 188% at the end of the year turns out to be 18.79% is paid instead because of other expenses like mortgage insurance and loan origination fees.
  • What is APR in Finance and it can be very deceiving as you think there are more time left on for you to pay the money and interest nominal interest rate at the end of the year but by the time the whole money is to be calculated, you might find out that you will not be able to pay the money.

Some considerations in taking APR

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  • Before taking loan and want to go into APR instead of monthly interest rate, you should consider the interest rate itself. The interest rate charge by lenders varies from one lender to another. As borrower, you should know the interest rate that will be convenient for and by the time you would have to multiply it by 12 months, it should give you something that you will be able. Do not be deceived that there is, much time by collecting or accepting APR that would be hard to pay by the time you calculate your expenses and the rate at which money comes from the investment the loan was used for.
  • Consider the other expenses on the APR as this would be added to it at the end of the year and you will have to pay it. If you have calculated your APR and sees you will have to pay a particular rate at the end of the year, you should always remember that other expenses like mortgage insurance and origination fees would be added at the end which would make the payment get increased. So you should consider the mortgage insurance and origination fees if they are actually high or low enough to be paid. The term what is APR in finance is already cleared in the first half.
  • Consider the defaults in the APR. The charge given for not paying at the end of the year. You must always know that you might not be able to pay the APR at the end of the month, so before signing the promissory note, you should agree with the loan issuer on considerable amount of finance charge if you are not able to pay at the end of the month. The finance charge should be way lower than the interest rate but some loan issuer makes it larger than then interest.
  • If you are credit card user, you should know something about banks that most of them practice variables APR which means their interest rate changes. For example, a bank that issues credit card might have its charges to be 12% and prime rate to be 7%, you will have to pay 19% APR at the end of the year. You should get banks that there prime rate and charges are lower. Some banks also practice fixed APR which I would advise you to do because the APR or charges can never be changed without your consent and a written agreement.
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Harish Yadav

Finance and market analyst and chief writer on howtofinance. Passionate to read books and articles on marketing and accounting. Also edits other articles and publish them here.

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