All You Need to Know About APR in Personal Loan

by Jeremy

When choosing a personal loan, many borrowers opt for an offer with the lowest interest rate. Though a lower interest rate might help you save on interests, other costs like processing fees, insurance, and administrative charges can nullify all you have saved.

That’s why it’s better to compare loans based on the APR (Annual Percentage Rate). With that said, if you are new to borrowing, you might be unaware of the term. Here’s a quick guide on APR, how it works, and why it’s useful.

Personal Loan

What is APR?

When you approach a lender to avail of personal finance, you come across two rates –

  • Nominal interest rate
  • Annual Percentage Rate (APR)

Here, the nominal interest rate denotes the interest a lending institution will charge on your borrowed amount. It is also called the principal l. However, this figure doesn’t give you an idea of expenses like penalties, processing fees, pre-closure charges, which the lender charges at a specific loan percentage.

Annual Percentage Rate tells you the total amount – interest + fees – that you’ll pay over a year on your loan. Just like personal loan interest rates, this is also expressed in percentages. Besides, APRs can be both fixed and variable, which can fluctuate or remain the same over the loan tenure.

One important thing to note: APRs come in two types – Personal and Representative.

Representative APR is calculated based on the advertised interest rate. On the other hand, Personal APR allows lenders to offer you based on your credit profile and personal loan eligibility. Here, the Personal APR can exceed the Representative APR.

So, it’s best to improve your credit profile to receive lower APRs.

How does APR work?

APR includes both the interest rate and miscellaneous fees, including processing charges and insurance costs. It gives you the actual cost of borrowing a loan.

For instance, let’s say there are two lenders – A and B. Lender A offers an interest rate of 10% on a loan, whereas lender B charges a 12% interest rate. However, lender A charges an APR of 12%, while lender B only charges 11%. So, by referring to the APR, you know that although lender A offers a lower rate of interest, they charge higher annual fees to account for it.

In a nutshell, by referring to the APR, you can compare different loans and choose the less expensive option.

If you wish to calculate the APR yourself, here’s the formula:

APR = [{(Fees + Interest rate)/Principal}/n]*100*365

Calculating the total loan cost with APRs can get cumbersome. That’s why you can use a personal loan EMI calculator.

Over to you

Now that you are familiar with APR, you can use it to effectively compare multiple loan products and choose the one with the lowest personal loan repayment amount.

Moreover, given how APR highlights the actual loan cost, you can prevent getting caught up in the weeds of complicated fee structures. Get a clear picture of what a loan offers by referring to a single figure. Happy borrowing!

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