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What is APR? How to Calculate APR - Explanation of How APR Works, Free APR Calculator and Information

What is APR?

In its simplest sense, the APR (Annual Percentage Rate) is the percentage sum that will be added to a loan when repayments are calculated.

As a means of calculating what one is required to repay, it is actually a very handy mechanism for the borrower as it negates the needs to factor in any additional costs, set-up fees and hidden charges when deciding upon which particular loan product to opt for. The lender is obligated to include all of these things when calculating the APR, as a result of which the borrower can simply deal with the bottom line figure. It does not, of course, take into account any penalty fees incurred for such things as late payment, which may vary between lenders, nor indeed any insurance that you may agree to pay in addition to your basic loan.

The four considerations incorporated into an Annual Percentage Rate are – the interest rate itself, when it is charged (i.e. weekly, monthly or annually), start-up fees and any other hidden costs. All these are then joined together to make the APR, which is the inclusive figure the potential borrower will be quoted and the comparator that will be used when measuring the offer against other quotes.

When defining what is APR, it is a simple combination of these four elements.

It is because the quoted Annual Percentage Rate is so precise and immovable that many lenders will advertise their rates by quoting a “typical APR”. Whilst this may succeed in catching the borrower’s eye, it is not the figure that will be of interest when seeking to compare the offer with others. Only when the borrower has been offered a firm quotation, usually based upon his or her own personal circumstances as measured according to a number of criteria, will it be possible to make a direct comparison with other offers.

So what is APR and how is it measured in monthly terms?

One thing to bear firmly in mind is that any interest charged is likely to be compound interest rather than simply a straightforward calculation based upon the amount borrowed. This means that interest is charged upon unpaid interest rather than simply on any purchases or cash advances.

The APR therefore is one of two pieces of essential information that one needs before evaluating a loan offer or the terms attached to the issue of a credit card. The other is what charges are imposed that operate outside of the APR mechanism.

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