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What is Annual Percentage Rate (APR)
Reviewed by: Fibe Research Team
- Updated on: 11 Dec 2024
- Published on: 19 Aug 2022
Reviewed by: Fibe Research Team
RBI guidelines list a few terms relevant to investment and loans to ensure a robust and streamlined financial system. These terms are important to maintain transparency and for borrowers to understand what they are signing up for. These terms are also mentioned in the guidelines, as well as terms and conditions set by RBI.
Among these is the annual percentage rate (APR), a term you may come across often. All lenders must provide a key fact statement when giving a loan. It includes information related to APR as per the new RBI regulatory framework for digital lending services.
APR is generally known as the applicable interest rate on your borrowing. However, this is not all. APR does more than just denote the interest rate, as it gives you a holistic view of the borrowing cost.
APR is a percentage depicting the total cost of borrowing funds including interest rates and other charges. As such, APR includes all fees applicable to credit capital on yearly borrowing.
As per the RBI’s digital lending guidelines issued in 2022, APR is defined as the following: “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 the annual percentage rate definition, take note of the following pointers about the APR for a loan you borrow:
Insurance charges are considered when calculating a loan’s APR only when insurance is linked to the loan. Assuming you are taking a home loan where the insurance component integrates into the loan, only then are lenders adding it when computing the APR.
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. It considers 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.
Here is a brief collection of some common types of APR rates in India.
The APY rate is the annual percentage yield rate. It is primarily applicable to investments.
According to the new RBI regulations, you should get this information when you invest online. Also, you should double-check the Key Fact Statement to ensure there are no misunderstandings.
| Parameters | APR (Annual Percentage Rate) | APY (Annual Percentage Yield Rate) |
|---|---|---|
| Definition | Amount of interest applicable on amount borrowing and credit | Amount of interest earned within a financial year as an investor |
| Compound Interest | It does not add compound interest to the calculation | It adds compound interest to the calculation |
| Interest rate | The interest rate must be lower when borrowing | The interest rate should be higher as you earn it |
| Calculation | Includes additional fees like lending fees, processing fees, and settlement charges | APY does not consider any additional fees |
| Influenced By | APR can fluctuate due to market conditions | APR can also fluctuate due to market conditions |
Remember, both terms are important, and you will come across them when applying online. 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. The APR helps you arrive at the real cost of borrowing credit.
Also Read : APR Vs APY Differences: A Comprehensive Guide
You can calculate it by using a free digital calculator or by doing it manually. All you will need is to have the key values of the loan, which are:
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 the expression, you can simply input the values and get an accurate result.
The manual APR calculation 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: 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.
As you may have noticed, the APR equation 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.
Digital lending has made it easier and quicker for you to get funds. So, 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 of up to ₹5 lakhs and pay a nominal processing fee of up to 2%. Download our Instant Loan App or log in to our website to enjoy fast and easy access to funds.
APR overall represents the interest rate of your account as a borrower. It consists of all additional fees and charges, which include interest rates. Knowing more about APR will help you understand the final cost of borrowing other than just interest rates.
A fair APR can be 6%-10%, but it can depend on your finances and the lending climate. Instead of focusing on a figure, analyse the APRs of various personal loans and choose the most affordable one based on your repayment ability.
Yes. APR matters on a personal loan as it includes all additional charges along with the interest rate of your loan.
The APR of personal loans fluctuates based on the interest rate offered by the lender, along with other charges applicable to the loan. However, the APR value can go up to 44%.
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.
To get an estimate of the APR, use the following formula: APR = [{(Fees + total Interest)/ Principal}/ n] * 365 * 100. Here, n is the number of days. First, add the fees and interest rate payable and then divide this amount by the total loan amount. Then, divide this value by the tenure in days. You need to multiply this value by 365 and, finally, multiply the value by 100.
You can simply calculate APR from the interest rate by multiplying the periodic interest rate by the days of total loan tenure.
Annual percentage rate (APR) measures the true cost of a loan since it takes into account the interest rate as well as other costs associated with borrowing the amount.
APR on a credit card refers to the interest applicable on a credit account. In simple words, it is interest that you pay on credit cards when there is an overdue balance. You can calculate it using this formula: Credit card interest = [daily rate] x [total daily balance] x [number of days in billing cycle].
To calculate your monthly annual percentage rate (APR), find the current APR and divide it by 12. This will give you your monthly periodic rate. Then, multiply this amount by the current balance of credit to get the monthly APR.
