If you have in the past applied for an instant loan or have currently taken one, you are likely to have heard about Annual Percentage Rates (APR). Simply put, it is the interest that your lender charges over the principal amount you had borrowed.
It is probably the single important component of your loan that you need to thoroughly understand in your own interest. Sometime in the past, when APR did not exist, there used to be a breakup of different charges that a customer was required to pay.
Things have now been more simplified and all you now need to know is the APR. This gives you the opportunity to not only know your exact repayment obligations but also to compare APR across multiple lenders.
What is APR?
Let us understand APR with an example. APR is calculated by multiplying the simple interest the lender quotes with the number of terms for repaying the loan. For example, if you have taken $100 at a simple interest of 10%, to be repaid after a two-week term, then the APR is 10%.
This means that if you repay the loan after two weeks, you have to pay a total amount of $120. The amount is arrived by applying the simple interest formula where the principal is multiplied with time and rate of interest and the resultant amount is divided by 100.
So, it really makes sense to understand how APR is calculated
The main conclusion from the above exercise is that the longer your term, the more you pay. So, that gives you a valuable clue on how to handle payday loans. Let us understand with an example of how expensive a payday loan can become over a longer period of time.
On a payday loan of $100 with an interest rate of 10%, to be repaid after 10 weeks, if the calculation basis is two weeks, the term is 5. So, the total interest you have to pay is 50%. The total repayable amount, if you pay after 10 weeks, is $150.
So, the longer you stretch a payday loan, the more you have to pay. So, the best thing to do is to repay the loan as quickly as you can.
The government has made it mandatory for payday lenders to make public the APR they are charging from the customers. The Truth in Lending Act (TILA) makes it mandatory to make public the APR.
According to Senator Paul Douglas, who co-authored the Act, “the right to be informed-to be protected against fraudulent, deceitful, or grossly misleading information, advertising, labeling, or other practices and to be given the facts he needs to make an informed choice.” He also noted that it serves to “invigorate competition” by protecting the “ethical and efficient lender.”
So, obviously, to get the best out of such loans as fast personal loans and faxless loans, be aware of the terms and conditions.
Know Your APR From Your AER – Savings Initialism Explained!
Unless you are an expert, the language of finance can be puzzling. Rates and percentages can be difficult to translate and often, it can be hard to solve the one question that you want to answer: “just how much am I going to be paying?”
Before you can make the calculations, the first step is to understand what the different rates mean. Once this becomes clear in your mind then interest rates should become easier to understand.
Three letters which we hear and see frequently, yet how many of us actually know what they mean? APR stands for Annual Percentage Rate – it is used to measure the cost that you will occur from interests and upfront charges when you borrow money.
APR denotes the amount that you will be charged for borrowing over the course of a year. Therefore if you borrow £100 with a 6% APR, you will pay back £6 in charges and interest over the year.
are usually based on a borrowing history and personal circumstances, therefore, advertisements will tend to quote a ‘typical APR’. It is important to acknowledge that this may not be the APR that you will pay; it could be more or less than this.
Having said this, in order to advertise a figure as their ‘typical APR’, lenders must have offered that rate (or a better rate) to 66% of their consumers.
Where mortgages are concerned, lenders will typically quote a headline rate and an APR. This is because there are often administration fees on mortgages so the APR will denote a higher figure which incorporates these.
Similar to APR in the sense that it refers to a chargeable annual rate when you borrow money, however, the Equivalent Annual Rate is the rate which you could be charged on an overdraft. In contrast to APRs, this does not incorporate charges too, therefore, you must be aware that you could be charged overdraft charges on top of this.
EAR will give you an idea of the cost you would occur if you remained overdrawn for a year. However do not fall into the trap of thinking that it is as simple as the percentage multiplied by 12 months as EAR is calculated on three factors: the interest rate charged, how often it is charged and also the effect of compound interest.
Annual Equivalent Rate refers to the amount of interest that you will earn over a year as opposed to the interest that you will pay. It is quoted on savings and currents accounts and considers how often the interest is paid and the compounding effect.
This makes it easier for you to compare an account where interest is paid monthly with one where it is paid annually. The gross rate on an account where interest is paid yearly may appear higher than an account with monthly interest payments however when the effect of compounding is incorporated, this may not be the case.
The AER also accounts for any interest that you are charged for making withdrawals. Some providers offer an ‘introductory bonus’ on the first few months of a financial product. It is important to check whether this is included in the AER.
There are a number of different savings accounts and bonds options on the market, therefore, it is important to do your research in order to find the best one for you.