Published in APR
Image credit by Lily Georgia
Rosalynn Kang
Content Lead
September 21, 2024
Understanding Annual Percentage Rate (APR)
Understand what is APR, how APR works, its impact on loans and investments, and differences between APR, APY and interest rate through this blog.
How much could your investment REALLY earn you?
Picture this: You're about to make an investment, and you're excited about the potential returns. But what about the Annual Percentage Rate (APR)?
APR takes into account not just the upfront amount of the investment, but any hidden charges that can eat into your overall returns. 💸
Let's break down APR and see how it impacts your gains.
What is Annual percentage rate (APR)?
Annual Percentage Rate (APR) is the yearly rate earned by an investment (or charged for a loan) which takes into account not only the interest rate, but also additional fees or charges associated with the principal.
The basic components of APR are:
Interest Rate: This is the core cost of borrowing or investing.
Fees and Charges: These include any additional costs like origination fees, closing costs, or annual maintenance fees.
Compounding Frequency: This is how often the interest is added to the principal.
How is APR used?
APR helps you compare different financial products on a level playing field. By encompassing all the costs involved, APR gives you a more accurate picture of the true cost of investing (or borrowing), making it easier to compare different opportunities.
How to calculate APR?
The formula to calculate APR is:
APR = (Periodic Interest Rate x 365 Days) x 100
where Periodic Interest Rate is:
[(Interest Expense + Total Fees) / Loan Principal] Number of Days in Loan Term
If this seems a little much, don’t worry - many financial websites offer online APR calculators. Simply input the necessary details (loan amount, interest rate, fees, and loan term) and the calculator will provide the APR.
APR vs APY**: What's the Difference?**
APR (Annual Percentage Rate) and APY (Annual Percentage Yield) are both used to measure interest rates; but APR is the simple annual rate charged on a loan, which includes the interest rate and any additional fees, but not compounding. To learn more about APY, check out this blog.
APR vs Interest Rate: What's the Difference?
Interest rate is a fundamental component of APR, which is basically the percentage of the principal amount that is paid to the lender.
APR provides a more holistic view, including the interest rate as well as additional fees associated with an investment, giving you a clearer understanding of its true cost.
The Bottom Line
Understanding APR empowers you to make informed decisions, avoid hidden costs, and ultimately, achieve your financial goals. So the next time you encounter APR, remember: it's not just a number; it's the key to your financial freedom.
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