By Zack Devin
Understandably, opting for a personal loan in India is a huge decision. So, a personal loan can be pretty complex, whether it’s for consolidating debt, travel, education, or home renovation. So, you must understand APR before selecting the best loan app. Think of APR as the magic key that uncovers the cost of the loan. It’s not just an interest rate but an expense that helps you understand the personal loan amount you can apply for.
APR (or annual percentage rate) measures the total amount of money you need to repay, considering your loan terms. In contrast, your interest measures the total amount you must pay back in one single year. So, how do you distinguish APR from the interest rate? Let’s find out the details in the following table. But before that, here’s what APR and interest rate mean individually.
An Introduction to APR or Annual Percentage Rate
APRL determines the amount of the loan by considering the cost of borrowing and other associated expenses like:
- Monthly fees
- The amount of time you plan on repaying the loan and more
Lenders use this standardised measurement to help borrowers understand the loan’s true cost.
Notably, APR is used for both secured and unsecured loans such as:
- Personal loan
- Home loan
- Car loans and more
It includes the interest rate, upfront costs, and other charges. To explain the concept, let’s cite an example. Suppose you have a personal or emergency loan with an interest rate of 7.5%. You pay Rs. 7000 over a year.
In that case, the APR is 7.5% in addition to the fees (in this case, it’s Rs. 7000). So, the total percentage comes down to at least 8.5 or 9%. The interest rate is lower, while the APR is higher. That means you can take a longer repayment time to pay back the amount entirely.
A Few Words on Interest Rate – How Is It Different from APR?
A percentage a borrower pays to the lender for a specific term is better referred to as the interest rate. This percentage might be fixed or floating. That means it can either remain the same or fluctuate.
Every borrower repays the initial amount borrowed and the interest. Nonetheless, the interest rate doesn’t include additional charges or fees considering the loan. Notably, the interest rate is the expense of borrowing for a certain period of time.
What Distinguishes APR from the Interest Rate?
You won’t be able to take advantage of availing the loan unless you understand the differentiating parameters between interest rate and APR. So, here’s a table that narrates the features of APR and interest rates.
| Feature | APR | Interest Rate |
| What Does It Mean | APR is the percentage that reflects the total cost of borrowing over a span of one year, including fees and other interests | A personal loan interest rate is the total cost of borrowing for each year through monthly instalments (EMI) over a fixed term. |
| What it covers | Covers costs like processing charges, insurance premiums, administrative fees, etc. | Just the base interest rate on the loan amount |
| Purpose | Assists borrowers in comparing the actual cost of various loans | Assesses the affordability of the monthly repayments |
| Impact of Cost | Impacts directly the total amount that you repay | Affects your monthly instalments (EMIs) |
When you opt for a loan, these two terms can assist you in understanding the loan costs. So you can negotiate a better loan.
How do You Calculate APR?
Every financial institute or bank follows its own set of rules. So, the annual percentage rate, considering the loan, might differ from one bank to another. You can check the APR and calculate the rate urgently if you need an online personal loan. For this reason, you must follow a formula:
You need to understand the compound interest rate during a fiscal year. Depending on the crucial aspects, you can easily calculate the APRL in simple ways:
- Compounding the interest rate on the loan for each year, excluding the fees
- Include the fees in the outstanding balance to calculate the compound interest depending on the total amount
- Pay the fees as the short-term loan due in the initial payments
Then, pay off the outstanding unpaid balance as the second long-term loan.
Alternatively, you can also compute APR using a simple formula:
APR is equal to [2 x Number of Payments for each year x Your Total Finance Charges] / [Your Original Loan Proceeds x Total Payments + 1]
With this formula, you can calculate the loan’s APR.
Understanding the Advantages of APR Advantage for Making a Smarter Personal Loan Selection
The following are the advantages of APR to make a smarter personal loan selection:
Save Money
Missing a payment or defaulting on loans may result in penalties for late fees. Thankfully, lenders can legally incorporate the potential fees into APR calculations. So, if you experience a fault during repayment, the APR gives a realistic scenario of the maximum expenses required. All you need to do is compare APRs and understand how much you must pay.
Understand Your Budget Better
Are you planning to organise a wedding or a travel plan? APR gives you a better idea about the loan term. You can understand how much you must pay annually, including interest and other additional charges. This way, you can create a realistic plan and factor in the monthly loan repayments without uncomplicated surprises.
Negotiate with Confidence
Once you understand APR, you won’t be confused about the repayment. You may use APR to compare the loan terms and offers and choose a reliable one from a trustworthy lender.
So, What Defines a Good APR?
Borrowers with good or excellent credit scores will receive lower rates than those with lower credit scores. Lenders review the application, but the credit score isn’t the only aspect.
Someone with bad credit may still qualify for a low CIBIL score loan. The lender works specifically with the bad-credit applicant and considers other application aspects, such as employment history, monthly free cash flow, etc.
So, focus on the APR disclosed by every lender when comparing personal loan offers. Understanding and prioritising this saves you money and helps you make a great decision.
