Annual Percentage Rate

What Is The Annual Percentage Rate?

The Annual Percentage Rate (APR) is a return charged annually on a sum of money loaned or used for investment, taking into account all expenses in addition to the interest rate.

Deeper Definition

Your annual percentage rate (APR) is the interest rate you pay on your debt, credit card, or other types of credit periodically. Lending money from a bank comes with a price tag. To earn, banks and other financial organizations charge a portion of the amount borrowed, and APR is a percentage of the total amount owed.

In most cases, loans either have a fixed or variable APR. A fixed APR loan has a predetermined interest rate that cannot alter, whereas a variable APR loan has an interest rate that is likely to change at any moment.

A fixed APR loan guarantees that the interest rate charged to the principal amount borrowed will not vary. As a result, the APR you compute using your rate of interest will remain unchanged.

The interest rate charged to the principal amount in a variable APR loan fluctuates from time to time, and the APR changes with it. Modifications in the prime lending rate in the United States or other indices affect this change.

How to calculate APR

The equation for computing the APR is uncomplicated, and it is calculated by multiplying the annual interest rate by the number of periods in which the rate is applied.

Interest is the total interest paid throughout the loan, the principal is the loan amount, and n is the number of days in the loan term.

Annual Percentage Rate Example.

A person takes a $25,000 loan to purchase a motorbike. The loan has a set APR of 5% and thus must be repaid over five years, which means he will be paying around $470 each month to cover both the loan and its interest. The quarterly amount due stays unchanged, but when additional payments are made, the proportion changes.

The amount paid in interest fluctuates as the person pays for five years. $1,500 is being paid annually, but the amount will increase as the person makes payments. In total, $28,306.88 which includes $25,000 as loan principal and $3,306.88 as the interest.