Annual Percentage Rate

Financial Dictionary -> Loans -> Annual Percentage Rate

The Annual Percentage Rate is the corner stone to decision-taking when you have to choose between different loans. This instrument gives an idea (although not brilliant) of how much a loan may cost you.

If you play the role of a borrower and have no financial education, most of the time you will depend on the information that a bank official gives about your loan options. Nevertheless, sometimes loans can be perplexing and your nice impression of a low interest rate may turn into a real crocodile, eating up most of your savings. Therefore, the Annual Percentage Rate should be watched closely.

The APR reflects the cost of a loan in the form of a percentage and is calculated on an annual basis. For example if you owe 1000 EUR and you have a 10 % rate, you'll probably pay 1100 EUR at the end of the year.

However, be careful about using this tool for the calculation of loan costs. APR includes different charges at most loan-giving institutions. The rate may comprise of fees, mortgage insurances, and discounts. So, you shouldn't lean only on APR when you choose among different loan packages.

In general, the annual percentage rate can be nominal and effective. The nominal APR is the rate for a certain period of time, divided by the number of payment periods in one year. The effective APR includes the service fees and other kinds of charges that are added to your monthly payment. The rate excludes one-time fees paid to third parties, penalties, etc. Despite these assumptions, regulators haven't defined the exact fees that should be included, and this factor creates confusion in potential lenders.

The calculations may take time and effort, while it is much easier to use an online APR calculator. This instrument can be found either on the site of every financial institution or on websites with similar subject matter. Some tools over the Internet allow to just type the monthly payment you'd like to make. Then, you can see the results and relevant provisions that financial institutions offer to you, of course, in figures. Again, don't rely solely on these tools while reflecting on loan options.

It's best if you define appropriate questions and ask the bank official about the APR and the real cost of your loan. These may include major considerations such as:

- What fees are included in the APR?
- What fees are excluded and when should you pay them?

Take advantage of the preliminary information that an APR offers and then ask for loan. Next, make use of call centers in financial institutions, banks, etc. to ensure that your calculations of the loan match the real cost. Then, you may go ahead and borrow your loan.