What is Annual Percentage Rate (APR) and How APR is Calculated

Read to understand the meaning of APR, how does it work, and why is it important.
What is Annual Percentage Rate (APR) and How APR is Calculated
5 min read
20 Mar 2023

The process to choose the right loan does not mean choosing the lender that advertises to offer the personal loan at the lowest interest rate. Advertised or representative interest rate fails to show the actual cost of borrowing to the borrower. In fact, it is only the nominal interest rate and does not include other costs of the loan. Due to this reason, the final cost of a loan comes out to be much higher than the advertised interest rates. Following the advertised interest rates will directly affect your finances over a longer tenure.
Therefore, knowing about annualised percentage rate (APR) and following the computation process in detail will help you to know the actual cost of borrowing beforehand.

Let us understand APR in detail and learn about how is it calculated.

What is the Annual Percentage Rate (APR)?

APR stands for Annual Percentage Rate (APR). It is a percentage that indicates the annual cost of the loan. APR also includes other costs such as processing charges, administrative fees, insurance premiums, and more. APR gives borrowers a more accurate figure of the total cost of a loan.

There are 2 types of APRs - representative and personal.
Representative APR is based on the advertised annual interest rate on the loan whereas, personal APR is based on the annual interest rate offered to you by the lender based on your eligibility and financial profile. It is important to note that the personal APR may be higher than the representative APR, as it depends on your overall creditworthiness.

How does APR work and how to calculate it?

APR is the annual cost of the loan expressed as a percentage. It includes the interest rate and other costs of availing the personal loan. This gives you the true cost of borrowing the loan per year. It is important to calculate the APR before you borrow a personal loan, so that you are aware of the actual amount payable by you.

Here is the formula to calculate the annual percentage rate.

APR= [{(fees + interest)/ principal}/ n]*365*100

Here, ‘n’ is the tenure of the loan in days.

Why is it important to know about APR?

APR is important as you will be repaying the borrowed sum at this rate. APR will help you to stay away from paying high EMI payments and also assists you in comparing multiple personal loan offers.

Knowing the APR beforehand could also help you in planning your monthly budget appropriately. You may check what EMI you will need to pay for your loan with a personal loan EMI calculator.

Knowing the APR will help you borrow funds wisely, compare among various personal loan offers, and decrease your cost of borrowing. When scouting for offerings in the market, this ensures a proper comparison, based on the total cost.

Bajaj Finserv Personal Loan stands out among the others as it has the most competitive APR and comes with several value-added loan benefits too.



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