Personal Loan

15 March 2023

# APR: What is it and How to Calculate?

To foster financial inclusion, it is crucial for all borrowers and investors to understand the financial jargon that they may be exposed to. These key terminologies are usually part of the introductory or promotional literature and may be visible in documentation too. Among these is the annual percentage rate (APR) and you may now come across this term more often due to the new RBI regulatory framework for digital lending services. As per the new regulations, all lenders are required to provide you a Key Fact Statement, within which you will find the APR information.

But what is APR? Simply put, it is an acronym for annual percentage rate, and a common misconception around it is that it is basically the applicable interest rate. APR does more than just denote the interest rate and is meant to give you a holistic view of the cost of borrowing. This is why calculating APR before you avail of a loan is key, as it isn’t wise to simply consider the annual interest rate on offer. To know more about APR, the guidelines to follow when calculating APR, and to clear doubts when comparing APR vs APY, read on.

#### What is APR?

The annual percentage rate is a term used to denote the total cost of borrowing funds and is expressed as a percentage. APR is calculated by accounting for all the charges and fees applicable on the instrument on a yearly basis. This is different from the interest rate as it only accounts for the rate chargeable on the principal borrowed.

Even if you calculate the interest payable based on the annual interest rate, you will not get the APR for that instrument. The APR is usually a tad bit higher than the advertised interest rate, which is why you should know to calculate the APR before you finalise any loan offers.

#### How can you go about calculating APR?

There are two main ways to go about calculating APR. Thanks to digital advancements, you can now do it online with digital calculators, and many of these services are free. Here, all you will need is to have the key values of the loan, which are:

• Principal amount
• Loan tenure
• Interest rate or total interest payable
• Associated fees

To know the fees payable, you will have to inquire with your lender. Sometimes, these charges are a percentage of your loan amount, while some lenders may levy a flat charge. With these details, you can simply input the values and get an accurate result.

The other option to know your annual percentage rate is to do the calculation manually. The formula is as follows:

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

Here, ‘n’ is the number of days, as per the tenure.

Here is an example to explain this further. Consider a loan of ₹1,60,000 with the total interest payable as ₹24,000, tenure of 24 months and associated fees of ₹6,000.

Step 1: Add the fees and the total interest payable, which comes to ₹30,000
Step 2: Divide these results with the loan amount, which is (30,000/1,60,000) and this comes to 0.1875
Step 3: Divide this value with the tenure in days, which is 0.1875/730.50 and this comes to 0.0002566
Step 4: Multiply this value with 365, and then multiply the result with 100, which is (0.00018822365)100, and this comes to an APR of 9.365%

As you may have noticed, the formula requires you to convert values for accuracy and this alone can be a tedious process. This is why online calculators are often preferred.

#### What is the APY rate and is it applicable for lending?

The APY rate is the annual percentage yield rate and is primarily applicable to investments. It is basically the interest earned on investments and so it isn’t applicable for loans. So, comparing APR vs APY would not help you make better borrowing decisions.

These pointers should help you confidently address any doubts surrounding the APR vs interest rate debate. Remember, both terms are important and you will come across them when applying for loans, but the APR gives you a holistic view of the undertaking. This is why you must compare the APR for various loan offers to know which one suits your capabilities best. According to the new RBI regulations, you should get this information when applying and you should double-check the Key Fact Statement to ensure no misunderstandings.

Digital lending has definitely made it easier and quicker to acquire funds, and you should pick lenders that are completely transparent and forthcoming in all dealings. With Fibe , you can access a wide range of instruments and enjoy complete compliance with all governing regulations. Here, you can borrow freely and with full confidence.

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