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APR or Annual Percentage Rate is a very common term in the banking world. Though common, this term might result in confusion for the first-time loan borrowers. This is an interest rate that is different from the standard rate of interest and that is why an applicant must have a good amount of knowledge about APR before opting for a personal loan. Only when you understand the different types of interest rates that you have to pay annually, you can enjoy the best advantages of availing a loan.
As the name suggests, APR or Annual Percentage Rate is the annual rate that is levied by a bank or any financial organisation for borrowing a loan or earning through an investment. In other words, it is the interest applied on the total amount of loan borrowed by an individual in a year. This rate is expressed in the form of percentage and is applicable to all the financial products borrowed by the customers. This percentage denotes the real cost of the loan across a year and the borrower needs to pay this amount annually to the bank or lending institution where he or she has procured the loan from.
In other words, APR is the method to compute the annual cost of the credit that you have taken or will take from a particular bank. It consists of the actual interest rate, the processing fee, foreclosure amount, and all other fees charged by a bank on the loan.
The nominal interest rate is the amount charged by the lender on a loan as its interest. It doesn’t take any other expense like processing fees, pre-closure charges, penalties etc. under consideration. On the contrary, APR or Annual Percentage Rate is the amount that includes the nominal interest rate, processing fees, penalties and all other charges that are applicable to the loan. Since this rate is a combination of all the payments that you have to make against your loan across a year, it is higher than the nominal interest rate of a loan.
APR has its own advantages over the standard interest rate of a loan. Here are the benefits of APR against the basic interest rate for your ease of reference:
An APR calculator is a tool through which you can calculate the annual amount that you have to pay for your procured loan. You just need to input the interest rate, processing fee and other particulars related to your loan and the tool will instantly show how much you actually need to pay by the end of the year.
An APR calculator is a simple and easy-to-use tool. Borrowers can easily compute the actual cost of their loan by using this user-friendly tool. This is how it works:
Most of the popular banks have their own APR calculators on their respective official website. In case you can’t locate the calculator of a particular bank, download any basic APR calculator available online to find out the annual cost of your credit.
The Annual Percentage Rate or APR is not the same for all banks and financial institutions. The rate varies from bank to bank based on their interest rates and other charges. This is why a borrower must know how much APR he or she has to pay against a loan from a particular bank before signing the final document.
Most of the banks decide the APR of a loan based on the financial profile of the applicant which includes his or her credit and debit history, credit repayment record, credit score, and details of past transactions. After applying the standard interest rate, banks calculate the other applicable charges on the loan and decide much the loan will cost in a year. The final APR is computed on the total amount offered to the borrower.
In most of the cases, banks don’t disclose the APR of a loan to its borrower at the time of application. But the applicants can calculate it on their own before taking a loan from a specific bank.
When you borrow money through personal loans, you naturally want to get loans at a low-interest rate. You would search out for loans that come with a low monthly interest rate in order to make sure that you have to pay less amount as EMI in the long run. But it is not easy to find out the most inexpensive loan, rather it is quite confusing. While some vendors offer loans at low rates with high fees and charges, the others provide high-cost loans at minimal fees and charges. As a result, there are high possibilities that you end up taking a loan which will actually cost you high in the long run.
But, if you calculate the APR of various banks you will get to know the actual cost of the loans and based on that you can easily decide the lowest option. The calculated APR will include the accumulated rate of interest on your loan along with the fees and other charges applicable to your loan in one year. Hence, before applying for a personal loan with your desired bank, it is essential to check the Annual Percentage rate of the loan, compare between the annual rates of other lenders and pick one with the best rate.
As told earlier, the annual percentage rate of loans and other credit agreements are never the same for two particular banks since every bank has its own criteria for deciding the rate. So, when you are in urgent need of funds, visiting each and every bank website individually and checking out the APR will be a tedious task. You can simplify the task by making use of the APR calculator to compute the annual percentage rate of the personal loan charged by a particular bank. In case you don’t have access to a calculator, you can calculate it manually using a simple formula.
The basic components of the Annual Percentage Rate are the loan fees and the compound interest rate during the year. On the basis of these components depending on the loan terms, you can calculate the APR effectively in three simple ways:
By following any of these simple procedures, you can find out the APR of your personal loan whenever you want to.
Though the APR of a loan can be easily computed using any of these ways based on its terms, here is the basic formula of calculation that includes the main components:
APR = [2 x Number of Payments per Year x Total Finance Charges] / [Original Loan Proceeds x Total Number of Payments + 1]
Using this formula you can easily calculate the APR of your loan manually through Microsoft Office Excel or Google Spreadsheet.
People who already have existing personal loans at some point of time might want to reduce the APR that they are paying for the loan. High APR means high rate of interest resulting in high interest outgo every month. Since APR comprises of the interest rate applied on the loan, considering to reduce APR on the existing loan is a good idea to decrease the EMI payments every month. Here are a few ways how you can reduce the APR on your existing loan:
Your credit record plays a vital role in deciding the APR or annual percentage rate of your loan. So, it is obligatory to check your credit record on the first-hand before approaching the lender with your request. If you have low credit score then the chances of reduction in APR is also low as a lender in most of the cases will not be willing to reduce the APR of a borrower who is having a low credit score. Individuals who are considered as high-risk borrowers are mostly offered with high-interest loans. So, the best way to reduce your APR is to improve your credit score first.
Borrowers who want to lower their APR, have to prove themselves as trust-worthy customers having good repayment and credit-management ability. When it comes to lowering the interest rates and charges of a loan, banks consider only those customers who make all their payments on time without any glitches. Banks decide the credibility of a customer on the basis of his or her past repayment records. Hence, to enjoy reduced APR you need to show yourself as a disciplined and sincere borrower by paying the EMIs and other bills on time. Once you establish your reliability, you can ask the bank to lower the APR of your loan.
If you don't have a good credit score but want to lower the APR of your existing loan, you can reach out the lender and clearly discuss why it is so important for you to get a low APR at the moment. If you have been regular in paying your EMIs and other bills, then the lender might consider your case and lower the APR on your loan. When you share your financial hardships resulted due to illness, joblessness, and other issues honestly, the lender might understand the genuineness of your problems and approve your request. However, this will probably not work with lenders who are very strict with their rules and criteria.
In case you don’t get lower annual interest rate from your bank or lender, you can opt for a balance transfer from your existing bank to a new one which is ready to offer you loans at an interest rate that is lower than the existing one. In this option, you can move your existing loan to some other bank at a low-interest rate. Though you might have to pay the processing fees while availing this facility, there are banks which don’t take any charges for processing a balance transfer. When you switch your loan to a new bank at lower interest rates, the APR will automatically become low.
Last but not the least, paying off your existing loan with a new loan from another vendor is a wise option to get low APR. You can go for this option to discontinue with the high-interest loan and continue with a new low-interest one. Shop around, get quotes from various lenders, compare the rates offered by them and decide on the best rate. Once you get the new loan at low-interest rates, pay off the entire outstanding balance of the previous one. In this way, you will not only be able to reduce the Annual percentage rate of your loan, but will also be able to save a significant amount on the EMIs every month.
Though personal loans are very helpful for the borrowers to meet their urgent expenses and personal needs, this type of credit typically comes with a high-interest rate compared to other loans. This why a borrower must try to get a personal loan coming with low Annual Percentage Rate as that will enable them to save a big amount of money. By availing a low APR, you can cut plenty of interest from the EMIs that you need to pay throughout the year. Here are some of the ways to get a personal loan with low APR from the top banks:
Banks check the debit and credit history of a borrower before offering a loan. If the debit is under control and the credit score is high, the banks consider the applicant as a credible borrower having good repayment abilities. Borrowers with good debit history and a credit score above 750 are considered as low-risk contenders and the banks feel confident to lend money to such applicants. Pay your EMIs and bills on time, stop bad spending habits and implement better habits to improve your credit score. A good credit score will reflect your credibility and you can negotiate with the bank for getting better APR on the loan.
It is good to go for a secured loan against an unsecured loan as banks usually charge lesser interest rates on the loans taken against a security. The interest rate is low in these types of loans because the risk factor is less and the banks feel more confident while offering the amount. Since banks have trust on the borrower, he/she can negotiate to lower the interest rates and other charges further. In short, when you take a secured loan, banks get a protection cover against non-payment and this helps you to get the loan at low APR.
Borrowers usually prefer to get a loan at a fixed interest rate as the rate will remain the same for the entire tenure in spite of all market fluctuations. But in case of floating interest rate, the borrowers have to pay more interest when the interest rate goes high. So, if you opt for floating interest rate while taking a loan, banks will show high interest to grant you a loan as that is more profitable for them. Taking this as an advantage, you can ask and negotiate with the bank to reduce the APR on your loan.
Banks are at high-risk while offering a loan to a solo borrower with no guarantor because in case of non-payment of such loans banks are likely to lose the entire amount. To make up with the loss, banks charge high-interest rate on such loans. On the contrary, when you apply for a loan with a co-signer or guarantor, in case of non-repayment from the borrower’s end, the same is recovered from the guarantor. Hence, banks being on the safer side, levy less interest rate on the loans. So, manage a guarantor from your friend circle or family as the guarantor of your loan to get a low APR on it.
If you are not getting a loan with low APR from the banks, consider borrowing a loan from the non-banking institutions. Since there are multiple options of borrowing a loan these days, it is no more mandatory to go for the traditionals banks while availing a loan. Instead, if you consider taking a loan from non-banking organisations such as Credit Unions you can expect to get a low APR. A Credit Union is a type of non-banking institution which is run by a group of individuals who lend loans at a low-interest rate compared to the banks. But before borrowing from such institutions, ensure the authenticity of the organisations and then take the final decision.
There are multiple banks who are offering loans at a low APR to the borrowers. So, never be in a hurry to get a loan before you do a proper research on all the available options. While taking a loan, along with the interest rate, you must also compare the fees and other charges of different banks. Only when you compare all the loan options properly, you will be able to get a loan with low APR.
There are various government loan schemes which are designed to help the borrowers who either have low credit score or belong to poor financial background. If you opt for such a special loan scheme you might get a very low-interest-rate as well as APR compared to the commercial banks. So, check all the available government loan schemes before you zero your search on any specific commercial lender.
If you keep all these minor but very important factors in mind, banks will consider granting you a loan at a low APR.
APR is the standard of calculating the overall interest that you have to pay for a loan. As a borrower, you usually check only the interest rate on your principal amount at which you are getting the credit from the lender. But you miss to check the other applicable charges and costs such as the processing fee, foreclosing charge etc. As a result, you often fail to assess the best loan for yourself and end up taking a loan which costs you a lot until the end of the year comes.
This is not the case in APR. Through APR, you can calculate the actual rate of interest including all the charges levied by the lender on the borrower. Since, it will include the actual rate of interest that you will be paying in the entire year, you will get to know which lender is offering you the best rate. Moreover, as you will know the breakups of the rates and charges, you can ask your lender to reduce the rate of interest on your loan. So, know the APR of your loan or credit card and save a huge amount of money throughout the year.
Though APR is a vital aspect of a loan, most of the times banks don’t give any clear idea about this to the borrowers. The reason being, borrowers might change their decision of availing a loan after knowing the actual amount that they have to pay against the loan. However, as a borrower, you must find out the APR of your loan or credit card by yourself and then take a final decision. A wise decision on time will help you save a lot of money on the interest. So, before applying for a personal loan with any of the banks carefully check out the annual percentage rate that you have to provide against the loan to reap its maximum benefits. After all, you don’t want to pay more than the actual rate of interest.