Loans with the lowest interest rates might not always be the ideal option. Considering the advertised interest rate while calculating the interest cost may not reflect the accurate cost of borrowing. This calculation does not include subsidiary costs when you take out a Loan. At the end of the calculation process is the Loan cost, which is seemingly higher than the advertised interest rates.
You can correct it by having a standardised computation process in place to help determine the actual borrowing cost before applying for a Loan. The APR calculator is a tool that calculates the annual percentage rate by taking into account the Loan amount, fees, interest rate, and tenure.
How is it calculated?
When applying for a Loan, three important factors are selecting the appropriate Loan product, combining it with the right lending partner, and the prevailing interest rate. The calculator helps determine the loan's APR value based on the interest rate, Loan amount, term, fees, and charges.
It acts as a comparative figure when looking at various Loan products and offers by multiple lenders. The formula for calculating APR on the APR rate calculator is APR= [{(Fees + Interest)/ Principal}/ n]*365*100, where Interest is the total interest to be paid during the Loan tenure and N is its tenure in days.
Example
Suppose Mr. Ramlal plans to apply for a Loan of Rs. 10 lakh with a repayment tenure of 3 years. The applicable interest rate on the Loan is 15%.
A one-time processing fee of 1.5% is also applicable along with an Rs. 5000 insurance cost. Hence, the calculation of the APR will be APR = [{(15,000+5,00,000)/10,00,000}/1095]*365*100 = 17.17%.
The accurate Loan cost is 17.17% across the three-year repayment tenure. Compared to the 15% interest rate, the APR is higher. However, this formula does not work with floating interest rates and is not ideal if you are applying for a short-term Loan. The APR value can change after applying for the Loan.
Why is it important?
APR works as an important tool that helps prospective Loan applicants gauge the true cost of borrowing. In most cases, lenders might not reveal the total cost and only advertise the interest rate. Fees and additional charges are listed separately. APR is an extremely useful computation method when applicants apply for a Home Loan or a Loan Against Property. With long-term repayment tenures of generally 20 years or more, the rate or processing fee and additional charges add to a substantial part of the overall cost.
You can use the APR calculator to make accurate cost comparisons, make informed financial decisions, maintain transparency in Loan terms, effectively plan your budget, and evaluate multiple Loan options.
Final words
The Annual Percentage Rate is a great method for a comprehensive understanding of the cost of applying for a Loan. It also gives you the necessary insight into Loan products and lenders. This information helps you make a smart decision when choosing a financial product and your lending partner.
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