25 Nov 2020 | 5 min read
APR or Annual Percentage Rate is quite A general term in the banking space. However, even after being common, this term might lead to confusion for the borrowers who are applying for a loan for the first-time.
This is a rate of interest that is distinct from the standard interest rate and therefore an applicant must possess an adequate amount of knowledge about it prior to opting for a personal loan.
Only when you comprehend the varying sorts of interest rates that you have to pay annually, you can enjoy the optimal benefits of availing a loan.
What is an APR?
Why figure out the APR before availing a personal loan?
Many of you still would be having a common question that why calculate APR prior to availing a personal loan? Well, the answer is rather simple, when you take out funds via personal loans, you obviously wish to avail of loans at a low rate of interest. Right? That is where an APR helps you find out the best loan offer for you.
In other words, you would naturally seek different loan offers that have a low monthly rate of interest to ensure that you pay less amount as an installment in the long term but on the contrary, it is not that seamless to reach the most affordable loan, instead, it is pretty bewildering but if you compute the APR of several banks, you will figure out the actual cost of the loans and it will help you determine the lowest alternative easily.
The computed APR will include the compound interest rate on your loan along with other fees and charges applicable on your loan across a year.
Thus, before you apply for a personal loan from a financial institution, ensure to check the APR of the loan, contrast between the APR of other moneylenders, and pick the one that comes up with the best rate among them.
How do lenders determine the APR on a loan?
The Annual Percentage Rate (APR) differs from lender to lender on the basis of their rates of interest and other charges.
Most financial institutions determine the APR of a loan on the basis of the applicant’s financial profile which includes his/her credit history, debt repayment record, credit score, and details of previous transactions.
Once you apply for a loan, banks determine the interest rates and other additional charges applicable in a year.
For the most part, banks do not reveal the APR of a loan to its borrower while applying but the applicant can compute it on themselves prior to taking a loan from a certain bank.
How can you compute APR on your own?
When you have come across certain best loan offers, in order to calculate the APR on each of them, you can simply take the help of an APR calculator.
It is a tool that helps you figure out the annual amount that you will need to pay for a particular loan. To find out the Annual Percentage Rate of a loan, all you need to do is put the figures of interest rate, processing fee, and other particulars associated with that particular loan and within seconds, the tool will show you the actual amount you need to pay by the end of the year.
Most of the moneylenders have their own online APR calculator on their respective official portals. By any chance, if are unable to find the calculator of a certain lender, you can simply use any of these formulas to find it out:
How to reduce the APR on your existing loan?
If you are planning to get a new loan or credit card or transfer your loan to a new lender, you can reduce the APR by taking the following steps:
Nevertheless, APR is an important component of a loan, most often, banks do not give any clear idea about this to the borrower. The reason is quite clear, borrowers might move their decision of taking a loan from the respective lender after finding out the actual amount, they will need to pay against the loan.
Similarly, as a borrower, you also must figure out the annual percentage rate of your loan or credit card by yourself and then come to an eventual decision. A sensible decision on time will aid you to save a good amount of money on the interest.
Therefore, prior to applying for a personal loan with any of the banks, check out the APR carefully that you have to pay against the loan to enjoy its maximum advantages. Ultimately, you do not wish to pay more. Right!