When comparing loans or credit cards, you’ve likely come across the term APR (Annual Percentage Rate). But what exactly does it mean, and why is it important for borrowers?
At Today Finserv Consulting India, we help you understand financial terms like APR so you can make smarter borrowing decisions. Let’s break down what APR is, how it’s calculated, and how it differs from interest rates.
What is APR?
APR (Annual Percentage Rate) represents the total yearly cost of borrowing, including:
✔ Interest rate
✔ Processing fees
✔ Other loan-related charges
Unlike a simple interest rate, APR gives you a more accurate picture of the loan’s true cost.
Example:
• Loan Amount: ₹5,00,000
• Interest Rate: 10% p.a.
• Processing Fee: 1% (₹5,000)
• APR: ~10.5% (higher than the interest rate due to added fees)
How is APR Calculated?
APR considers:
• Interest rate
• Processing fees
• Insurance charges (if applicable)
• Other hidden costs
Formula:
APR is calculated using a standardized formula that spreads all fees over the loan term.
APR=(Total Interest + FeesLoan Amount)×365Loan Term (Days)×100APR=(Loan AmountTotal Interest + Fees)×Loan Term (Days)365×100
Example Calculation:
Loan Details Amount
Loan Amount ₹1,00,000
Interest (1 year) ₹10,000
Processing Fee ₹2,000
Total Cost ₹12,000
APR=(12,0001,00,000)×100=12%APR=(1,00,00012,000)×100=12%
APR vs. Interest Rate: Key Differences
Factor Interest Rate
Definition Cost of borrowing (only interest)
Purpose Shows base borrowing cost
Usefulness Helps compare interest expenses
Example Personal loan at 12% interest
Why is APR Important?
✅ Helps compare loans accurately – A loan with a lower interest rate but high fees may cost more than one with a slightly higher rate but no fees.
✅ Avoids hidden costs – Reveals extra charges not visible in the interest rate.
✅ Better financial planning – Gives a realistic repayment estimate.
Types of APR
1 Fixed APR – Stays the same throughout the loan term (common in personal loans).
2 Variable APR – Changes with market rates (common in credit cards).
3 Introductory APR – Low/0% APR for a limited time (credit card promotions).
FAQs
Is APR the same as interest rate?
No, APR includes interest + fees, while the interest rate is only the borrowing cost.
Which is better: low APR or low interest rate?
A low APR is better because it reflects the total cost, not just interest.
Can APR change after taking a loan?
• Fixed APR remains the same.
• Variable APR can change based on market conditions.
Why is credit card APR higher than loan APR?
Credit cards are unsecured and have higher risk, leading to higher APRs (up to 36-42% p.a.).
How can I get a lower APR?
• Improve credit score
• Negotiate with lenders
• Compare multiple loan offers
