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Anishka Bhadly
Anishka Bhadly is a content writer with a finance and business background. She has completed her bachelor's degree with a specialisation in finance and is currently pursuing an MBA in the finance field too. The knowledge she has gained from her studies and experience working with EdTech companies helped her combine theoretical knowledge with practical industry insight. Her expertise lies in creating well-researched, informative, and reader-friendly content in various banking, personal finance, loans, insurance, and investment-related topics.
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APR, or Annual Percentage Rate, is the interest rate that reflects the yearly cost of a loan. The APR on a loan can vary from its interest rate because it incorporates the charges and fees pertinent to getting the loan. APR is handy in comparing which of the two loans is a better deal even if their rates are equal because their fees might offset one another. In India, the lenders must provide the borrowers with the Key Facts Statement that will expound more on the pertinent charges applicable to a retail and MSME loan. It is essential for borrowers to understand the APR and other charges accompanying the loan. Therefore, borrowers should not depend on the interest rate advertised by the lenders.
Key Takeaways:
APR (annual percentage rate) is the yearly cost of a loan expressed as a percentage. This rate helps borrowers to have an overall understanding of the cost of the loan compared to another because it can contain more charges than the interest rate. In India, the applicable annualised rate, or APR, is due and disclosed in the Key Facts Statement (KFS) and the loan agreement. The APR is a useful guide to comparing loans, and it is critical that borrowers understand the information before accepting any loan offer.
The calculation of annualised cost of a loan assists in understanding the true cost of the money borrowed. A simple formula can be used to calculate the combined cost in respect of interest and applicable fees by adjusting the cost for the loan period to a yearly basis expressed as a percentage.
APR = [(Total Interest + Applicable Fees) ÷ Loan Principal] × [365 ÷ Loan Term in Days] × 100
Here:
Total Interest: Total interest payable during the loan period.
Applicable Fees: Relevant loan charges included in the calculation.
Loan Principal: Amount originally borrowed.
Loan Term: Total loan duration in days.
Assume that a person borrows ₹100,000 for 365 days. Assume that the total interest payable during this period is ₹12,000 and applicable fees amount to ₹2,000.
Thus, using this simplified calculation, the annualised cost of this loan is 14%.
Important: This formula is a simplified calculation and not necessarily a correct APR calculation. The true APR can be dependent on the timing of disbursements, repayments and charges and is generally calculated from the loan's actual cash flows. Hence, the APR/KFS figure disclosed by the lender should be used when comparing actual loan offers.
This formula provides a quick estimate of annualised borrowing cost. For an accurate APR comparison, the disclosed APR figure by the lender should be checked, and one should review the interest, fees, repayment schedule and other applicable charges.
An APR calculator can be beneficial in that it allows one to get a clearer idea of the total cost of a loan considering relevant interest and charges, compares different loans' total cost, and decreases manual calculation workload. Some of the key benefits include:
An APR calculator can help a borrower to save time while comparing loan options with a clearer overview of the total cost of a loan.
APR may vary depending upon how the cost of borrowing changes over the life of the loan. The two types of APR which are commonly used are fixed and variable APR. Knowing the difference between the two can help borrowers understand if their cost of borrowing and consequently the repayment amounts are going to remain the same over time of change.
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The difference between fixed and variable APR lies primarily in how the rate of interest charged can change over the term of the loan. Understand the applicable rate, terms and manner of repayment to understand the cost of borrowing.
A good APR is determined by a number of factors including the type of loan, current market trends and your personal financial status. The figures quoted in the given example are just an indication.
In India, for personal loans, the rates currently range from about 8.75% to 24% p.a.; for credit cards, the rates normally range from 30% to 48% p.a.; and home loan rates start at around 7.10% p.a. These are indicative rates, and actual rates may vary from lender to lender based on an individual's creditworthiness, income, and other factors.
Comparing APRs among different lenders gives you an idea of which institution offers the best deal. However, it is important to look at other aspects of the loan such as the term, processing fees, additional charges, repayment conditions and other restrictions. It is always advisable to read the small print or key facts statement attached to a loan by a financial institution to get a clear picture of the costs involved in a loan before deciding to take it.
Disclaimer: APR ranges and good APRs may vary depending on the type of loan, institution, personal financial status, market trends and other factors.
The APR allows the borrower to analyse the whole picture, the cost of a credit beyond the interest rate. Given that additional expenses and charges apply to the loan, APR and KFS should be used when comparing credit instruments to see one clear rate for credit. Still, it should not be relied on exclusively. Other factors, including loan tenure, EMI, total payment, and charges, should be taken under consideration before applying.
APR stands for Annual Percentage Rate. APR is the cost of the loan on an annual basis and provides a more comprehensive view on how much one will have to pay for borrowing compared to the interest rate.
Yes, APR is different from the interest rate. The interest rate generally represents the cost of borrowing the principal amount of the loan, whereas APR can also include applicable fees and charges.
APR provides the overall picture that shows what percentage points one will have to pay extra for borrowing the loan amount. APR is a better indicator of the cost of the loan compared to the interest rate and therefore allows one to compare different loans more effectively.
For a simpler calculation, APR considers total interest and applicable fees, compares it with the total principal amount and shows an annualised rate based on the term of the loan.
Not necessarily. One should consider tenure, monthly instalment (EMI), total amount payable, applicable fees and charges and prepayment terms and other conditions to choose between multiple loan offers.
Depending on the loan terms, a fixed rate will typically remain the same, and a variable rate may vary according to the relevant pricing or interest-rate terms.
Depending on the loan and the lender, applicable fees and charges may be included in the overall cost. Always review the lender's Key Facts Statement and loan documents.
Compare similar loan offers citing the disclosed APR, and review the loan amount, tenure, repayment schedule, fees and other terms.
The lender may disclose the applicable APR or annualised rate in the Key Facts Statement, loan agreement or other relevant loan documents.
Depending on the type of loan, APR can be a useful metric to understand and compare borrowing costs; however, disclosure and calculation practices may vary according to the relevant regulatory requirements. Always review the lender's disclosures.
