How to use an APR calculator before choosing a Loan?

Loans with the lowest interest rates may not always be the ideal option for you. Considering the advertised interest rate when calculating the interest cost may not accurately reflect the true cost of borrowing. This calculation does not include subsidiary costs that are involved when you take out a Loan. Hence, what you get at the end of the calculation process is the cost of the Loan, which is seemingly higher than the advertised interest rates.

The Annual Percentage Rate is a standardised computation process that helps calculate the cost of actual borrowing over a designated period. The computation is a percentage that represents the annual interest rate of the Loan, which is charged to the borrower. The APR calculator considers relevant fees applicable to a Loan, along with the nominal interest rate. It does not take compounding into account when calculating the true cost of interest on the Loan.

How does the APR calculator work?

The APR calculator requires you to enter some variables for accurate and instant results, such as:

• Your Loan amount in rupees
• Interest rate as a percentage
• Tenure in months
• Additional fees amount

You can see the APR of your Loan on the right side of the calculator. To determine the values of the points mentioned above, please refer to your Loan agreement copy if you are an existing customer, or the fees applicable to a prospective customer, as per the published terms and conditions.

How is APR calculated?

Multiple factors come into play when taking out a Loan. These parameters should be aligned to minimise any severe impact on your long-term finances. Three important factors are selecting the appropriate Loan product, combining it with the right lending partner and the prevailing interest rate. Based on the interest rate and fees, the APR calculator helps determine the Loan’s APR value.

This serves as a comparative figure when evaluating various Loan products and offers from multiple lenders. The formula used by the APR rate calculator is APR = {[(Fees + interest) / Principal] / n}*365*100, where interest represents the total interest payable during the Loan tenure and n represents the Loan tenure in days.

Points to note

APR is not a foolproof method and comes with its own set of drawbacks. The formula does not work with floating interest rates and is not ideal if you are taking out a short-term Loan. It is also important to note that the APR value may change after the Loan is taken out. Regardless of its shortcomings, APR serves as an essential tool that helps prospective loan applicants accurately gauge the true cost of borrowing. Lenders typically do not disclose the total cost and only advertise the interest rate. Fees and additional charges are listed as separate line items.

Conclusion

APR acts as a beneficial computation method when applicants are taking out a Home Loan or a Loan Against Property. With long-term repayment tenures of generally 20 years or more, the rate, processing fee, and additional charges add up to a substantial part of the overall cost.