APR rate calculator: How does it affect your Loan?

When you apply for any Loan, be it a Home or other Loans, the first thing you look at is the interest rate. However, the interest rate alone doesn’t tell the whole story about how much your Loan will actually cost you. That’s where the Annual Percentage Rate comes in. An APR calculator helps borrowers understand the complete cost of their Loan.

Let us take a closer look at what APR means, how it gets calculated, and how an APR calculator help with Loan planning.

What is APR, and how is it different from the interest rate?

The interest rate is simply the percentage a lender charges on the principal amount borrowed. It tells you how much you pay in interest each year, but it does not include other costs associated with the Loan. The Annual Percentage Rate, on the other hand, includes the nominal interest rate, as well as processing and administrative fees. The APR gives a more accurate picture of the total cost of borrowing.

How does the APR calculator work?

An APR calculator uses a simple formula to compute the annual cost of your Loan, considering both the interest rate and the total fees paid upfront or periodically.

• Loan amount (principal) – The total sum borrowed.
• Interest rates – The rate offered by your lender.
• Tenure – The repayment period in months
• Processing and other charges – Any one-time or recurring fees related to your Loan.

Factors that influence APR

The APR is not fixed. It varies based on multiple parameters:

Interest rates

• The primary component of APR. Lower interest rates directly reduces your total annual cost.

Processing fees

• A one-time charge for handling your loan application. A higher processing fee will increase your APR.

Loan tenure

• Shorter Loan tenures typically have higher EMIs but lower interest outgo, which can result in a reduced effective APR. Longer tenures may result in higher total interest, which can lead to a higher APR.

Loan type

• APR differs across products. Home Loan have lower APRs than unsecured loans, such as personal loans, because they are secured by collateral.

Borrower’s profile

• Your credit score, income stability, and repayment record can influence both the offered interest rate and processing fees, thereby affecting the final APR.

Why APR matters when comparing Loans?

When choosing a Loan, many borrowers make the mistake of comparing only the interest rate. While that is an essential factor, it does not show the actual cost of credit. The APR helps you make a fair, apples-to-apples comparison. APR rate calculator reveals the whole picture, including interest plus all fees, so you know exactly how much you pay over time.