APR: What is it and How to Calculate?

Published on: 19 August 2022

Modified on: 29 May 2023

To boost your financial literacy and make smarter decisions related to loans and investments, you need to understand a few financial terms. These key terminologies are usually part of the explanatory or promotional literature and may be visible in the terms and conditions too.

Among these is the annual percentage rate (APR) and you may come across this term more often these days. This is due to the new RBI regulatory framework for digital lending services. As per the new regulations, all lenders are required to provide you with a Key Fact Statement, within which you will find information related to the APR. 

But what is APR?

A common misconception about APR is that it’s the applicable interest rate. However, this is not true. APR does more than just denote the interest rate and is meant to give you a holistic view of the borrowing cost. 

To know more about APR, the guidelines to follow when calculating it and to be clear about the difference between interest rate and APR, read on. 

Annual percentage rate – meaning and relevance

APR or 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 fees and charges applicable to the credit you are borrowing yearly. 

As per the RBI’s digital lending guidelines issued in 2022, APR is defined in the following way: “APR is the effective annualised rate charged to the borrower of a digital loan. APR shall be based on an all-inclusive cost and margin including the cost of funds, credit cost and operating cost, processing fee, verification charges, maintenance charges, etc. and exclude contingent charges like penal charges, late payment charges, etc.”

Based on this definition, take note of the following pointers about the annual percentage rate for a loan you borrow:

• APR is an annualised rate, which means it is converted into a yearly rate for easy comprehension 
• APR represents the comprehensive cost of a loan and not just the interest rate per annum 
• APR includes all loan-related fees and charges such as verification charges, processing fees, maintenance charges and more that you, as the borrower, have to bear  
• APR does not include charges such as late payment, EMI bounce fees, or penal interest as these depend on you not repaying the loan on time 
• APR is expressed as a percentage, so you can calculate it based on your loan amount 

Keep in mind that the RBI has mandated two additional facts about the APR. 

Read on to know what they are. 

1. Annual percentage rate and insurance 

Insurance charges will be considered when calculating a loan’s APR only when insurance is linked to the loan. For instance, if you are taking a home loan where the insurance component is integrated into the loan, only then are lenders to add this when computing the annual percentage rate. 

2. Annual percentage rate for loans with a floating interest rate

When it comes to loans with rates that fluctuate based on market conditions, the APR will change too. In such cases, the RBI mandates that lenders need to include the APR considering the current rate of interest in the Key Fact Statement at the time of loan origination. When a revised APR applies, lenders need to share this figure with borrowers via further communication at the applicable time. 

Difference between interest rate and APR

As you can tell, the APR will generally be more than the interest rate applicable on a loan. It is different from the rate of interest as the interest-only accounts for the rate chargeable on the principal you borrow.

Even if you calculate the interest payable based on the annual interest rate, you will not get the APR. Since the APR considers other loan fees, you should check the APR before you finalise any loan offers. In other words, the annual percentage rate helps you arrive at the real cost of borrowing credit. 

How can you go about calculating APR?

There are two main ways to calculate the APR. Thanks to digital advancements, you can now do it online with digital calculators, and many of these services are free. 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, check with your lender. Sometimes, these charges are a percentage of your loan amount, while some lenders may levy a flat charge. No matter how these are expressed, you can simply input the values and get an accurate result.

The APR formula for manual calculation 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: Consider a loan of ₹1,60,000 with the total interest payable as ₹24,000, a 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 by the loan amount, which is (30,000/1,60,000) and this comes to 0.1875
Step 3: Divide this value by 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 using online calculators is often the easiest route to take. 

What is the APY rate and how it is different from APR?

The APY rate is the annual percentage yield rate. It is primarily applicable to investments. It is the interest you earn on investments and so it doesn’t apply to loans. Thus, comparing APR vs APY will 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. However, 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 you apply online and you should double-check the Key Fact Statement to ensure there are no misunderstandings.

Digital lending has made it easier and quicker for you to get funds, and you should pick lenders that are completely transparent and forthcoming in all dealings. With Fibe’s instant personal loans, you never have to worry about hidden fees. You can get a quick personal loan up to Rs.5 Lakh and just pay a nominal processing fee of up to 3%. Download our instant loan app or log in to our website to enjoy simple and easy access to funds. 

Frequently Asked Questions

Is APR better than interest rate?

Knowing the APR or annual percentage rate is better as it includes not only the interest rate but also other charges related to the loan, such as the processing fee. 

What percent of APR is good for a personal loan?

A fair APR depends on your finances and the lending climate and is very subjective. Instead of focusing on a figure, analyse the APRs of various personal loans and choose the most affordable one based on your repayment ability.  

Does APR matter on a personal loan?

Yes, an APR represents the actual cost of borrowing, as it considers your personal loan’s interest rate as well as other charges. 

What is the highest APR for a personal loan?

The APR of personal loans fluctuates based on the interest rate offered by the lender along with other charges applicable to the loan. 

How do you convert APR to the interest rate?

When you remove the other loan charges from the calculation of APR, you will arrive at the interest rate. However, it is best to simply check the interest rate by asking the lender.