What is APR and why is it a must before taking a loan?

  • April 5, 2022

When you take a loan, do you automatically assume that the bank which is offering the lowest interest rate is the best choice? But the fact is, there are other charges or fees which you need to pay too, and after factoring them in your loan cost, you get the annual percentage rate, or APR.

Here, we’ll be going into some detail about APR:

What is APR?


The actual yearly cost of your loan for any given tenure is your APR. It totals your interest fees along with any other charges levied by the lender, such as processing fees, insurance costs, among other things.

APR is calculated in percentage and it may be the same as or higher than the interest rate charged on loan.

How to Calculate APR?


Here’s the formula that you can use as an APR calculator:

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

The n represents the tenure of the loan in the number of days.

What are the benefits of APR?

  • Since APR is a sum total of various fees that are associated with the loan you have taken, it is an important tool which will give you clarity about your actual loan cost.
  • With the help of the annual percentage rate, you can make out which is the actual cheap loan provider.
  • APR is a standard calculation which is applicable for various types of bank charges. Therefore, you can apply it for any bank loan offer.

What’s the importance of calculating APR when applying for personal loan?


Naturally, you desire a low interest rate when you apply for a personal loan. Consequently, you’ll be most drawn to the banks which offer you the lowest rate. However, as we’ve now learnt, you’ll only know of the actual lending cost after you’re done calculating the APR.

That’s why you need to be aware of the many small but significant charges levied by the banks on their personal loan and only then come to a decision. Also, note that annual percentage rate doesn’t work for floating interest rate. It’s only meant for fixed interest loans such as a personal loan.

How to decrease APR of ongoing loan?

  • Depending on whether you manage to acquire goodwill by paying your instalments on time, the bank might consider your request to reduce the annual percentage rate.
  • Make a habit of paying bills on time and never miss your EMIs and credit card dues. You will soon get a good credit score, which will help you out as banks often make considerations for borrowers who have healthy credit scores.
  • Your remaining loan can be transferred to another bank which offers a lower interest rate. As always, be sure to calculate APR beforehand.
  • Take another loan from a different bank at a lower APR. You can repay your existing loan in full with that amount.

Always remember that the banks will not bother to inform you about APR and it’s something you need to figure out on your own. This is commonplace in most financial institutes, unfortunately. Fortunately, with increased awareness thanks to the internet, more and more people are developing awareness about the importance of APR.

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You might also like: Tips to improve your loan approval chances

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