InvestorQ : What is annual percentage rate? How is it different from the interest rate I am charged on a loan?
Kalyani Sundaram made post

What is annual percentage rate? How is it different from the interest rate I am charged on a loan?

Answer
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3 years ago
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Annual percentage rate, or APR, is the annual rate that a bank or non-banking financial company (NBFC) charges you for borrowing a loan.

It is not the same as interest, as it is the interest applied on the total amount of loan you borrow in a year. Hence, this percentage denotes the real cost of the loan you borrow, across a year, and it is this amount that you need to pay annually to your lender.

The APR is expressed in the form of percentage and applies to all the financial products borrowed by customers.

In other words, APR is the method to compute the annual cost of the loan you’ve taken or intend on taking from a particular bank or NBFC. It consists of the actual interest rate, the processing fee, foreclosure amount, and all other fees charged by a lender on the loan.

Difference between APR and nominal interest rate

The interest rate the lender shares with us is actually the nominal interest rate, which is the amount charged by the lender on a loan as its interest. The nominal interest rate doesn’t take any other expense such as processing fees, pre-closure charges, penalties, etc. into consideration.

In contrast, the 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 in a year, it is higher than the nominal interest rate of a loan.

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