Annual Percentage Rate (APR) - Definitions, Types, Uses & Formulas

Annual Percentage Rate (APR)

Now a days everyone taking loan for business or for buying goods for fulfill his/her dream. Taking debt or loan for any purpose are quite easy now a days. Many financial companies are providing loans and charges nominal interest rate for certain time period. Charges deducted from saving or loan make sometime more expensive to bear for the customer. When deciding between credit cards, APR can help you compare how expensive a transaction will be on each one.

Definition

APR is an annual percentage rate which is charged on loan/debt from the borrower or earning through an investment. It is expressed in terms of interest rate (%) and used for interest rate structure, transaction fees, late penalties,credit card, mortgages rate, etc. It does not computed as compounding in an account.

Types

Fixed APR

A fixed APR does not fluctuate with changes to an index. Interest rate may change but the issuer generally must notify before the change occurs.

Variable APR

A variable APR is generally tied to another rate such as the prime rate or the treasury bill rate. If the other rate changes than APR will also change.

What is the formula for calculating APR ?

Annual percentage rate (interest-based loan)

= Periodic Interest Rate for m Months × 12/m

Annual percentage rate (discount loan)

= Finance Charge/Amount Financed × 12/Term of Loan in Months

Where the finance charge is the product of principal, interest rate and time factor:

Finance Charge = Principal × Interest Rate × Term of Loan in Months/12

Amount financed equals the difference between principal and total finance charge:

Amount Financed

= Principal − Finance Charge

= Principal – Principal × Periodic Rate × Term of Loan in Months/12

Uses

This is known as the net present value method for calculating APR. The payments, Pj must be based on the Total Charge for Credit (TCC). The TCC is the sum of all mandatory charges incurred over the term of the agreement that the borrower must pay. In the UK this includes:

• Interest.

• Administration, documentation or arrangement fees.

• Mandatory payment protection insurance fees.

• Mandatory maintenance or product guarantee fees.

• Credit brokerage fees paid by the borrower.

• Option to purchase fees (for hire-purchase agreements).

• Charges for linked transactions which only exist because of the credit agreement.

For example, a mandatory servicing contract on a washing machine, which was bought under a hire-purchase agreement.

• Any other fees for services charged as part of the agreement.

Note : APR is generally used by the credit card company. Customer must have an information about the charges (APR) on their credit card.