Word of the Week 'APR (Annual % Rate)'


What Is an Annual Percentage Rate (APR)?

An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account.

As loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors, a standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other lenders.

The Formula for the Annual Percentage Rate (APR) Is

APR Formula. Investopedia

APR is most often expressed in terms of an interest rate (%).

How to Calculate an Annual Percentage Rate (APR)

Annual percentage rate (APR) is a measure that attempts to calculate what percentage of the principal you’ll pay per period (in this case a year), taking every charge from monthly payments over the course of the loan, upfront fees, etc. into account.

APR is the annual rate of interest that is paid on an investment, without taking into account the compounding of interest within that year. APR is calculated by multiplying the periodic interest rate by the number of periods in a year in which the periodic rate is applied. It does not indicate how many times the rate is applied to the balance.

What the Annual Percentage Rate (APR) Tells You

The APR, by law, must be shown to customers by credit card companies and loan issuers to facilitate a clear understanding of the actual rates applicable to their agreements. Credit card companies are allowed to advertise interest rates on a monthly basis, but they are also required to clearly state the APR to customers before any agreement is signed. For example, a credit card may charge 1% a month, and its APR is 1% x 12 months, or 12%