What is the Annual Percentage Rate and what are its types?
Comparisons of credit and loan offers are based on the annual percentage rate or APR. You have to consider the annual percentage rate when paying interest and other fees, such as administration charges. Before signing the loan agreement, the lender must let you know the annual percentage rate.
What is an annual percentage rate?
Loan providers will charge different interest rates depending on their loan products and the duration of the loan. Comparing long-term credit products using the annual percentage rate makes sense since it measures interest rates over an annual period. When comparing products such as a personal loan or mortgage over the course of 3 or 5 years, APR is one of the best measures.
A loan’s interest rate is only charged on the loan amount, excluding any other expenses. On the other hand, APR takes into account both the nominal interest rate and any other costs associated with procuring the loan. An APR usually exceeds the nominal interest rate of a loan.
With an annual interest rate, the term per annum tells you how much interest you will be paying. Once you know the payment frequency, it makes things easier to understand.
Read Also: 10 Important Things you Need to Know When Availing of a Personal Loan from an NBFC
A 10% annual payment is, for example, paid semi-annually. The interest may be compounded semi-annually, in which case the interest earned in six months is invested for the following six months.
“Annual” interest rates are just the percentage of borrowed funds that are charged for one year. As a result, when the interest is due, the “effective” interest rate will be affected.
In return for someone lending you a specific sum of money for a particular period, you agree to repay the principal at the end of the period plus a percentage interest rate. It is determined by multiplying the amount borrowed by the number of years you’re borrowing it for.
Types of annual percentage rates
Finance charge
You must pay both the interest and the loan fees. The APR calculation does not include all costs. See more information online to find out which costs are included or excluded from the calculation during NBFC Growth in India.
APR
The annual rate represents the cost of the loan, expressed as a percentage. An APR is calculated by considering the following four factors: Loan Amount, Loan Term, Closing Costs, and Note Rate.
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