The annual percentage rate can be defined as the percentage or relative cost of credit, calculated annually. Remember that, this is your input in comparing costs, irrespective of your amount of credit or how long you have to repay it.
As for example, suppose you have a loan of $100 for one year and shell out a finance charge of $10. Here, you are paying an Annual percentage rate of 10 percent. Here, you can keep the entire $100 for the entire year and then repay $110 at year's end.
But in case you repay the $100 and finance charge i.e. a total of $110 in twelve equal monthly installments, you don't really get to use $100 for the year. Here, you use less and less of that $100 each month. So, in this case, the $10 finance charge actually amounts to an Annual percentage rate of 18 percent.
Remember that it is mandatory to all whether stores, car dealers, credit card companies, finance companies or banks to mention the cost of their credit in terms of both i.e. the finance charge and the Annual percentage rate.
Annual percentage rate format
There are several ways an effective annual interest rate of 10% can be expressed:
0.7974% effective 1 month interest rate
9.569% 1 year interest rate (monthly compounded)
9.091% 1 year rate in advance
These are all equivalent rates, but this can be confusing for those who are not enough practiced the finance math. Annual percentage rate is helpful to normalize how interest rates are compared, so that a 10%
loan is not made to look cheaper by calling it a loan at "9.1% annually in advance".
The Annual percentage rate does not necessarily convey the total amount of interest paid over the course of a year. Annual percentage rate, in the simple case of a loan with no fees (or, say, a credit card), is the monthly interest rate multiplied by 12.
It is important for you to know that though Federal law does not set annual percentage rate or other credit charges, but it stipulates their disclosure to the customers so that you can compare the costs of credit. As per Federal law, this information must be disclosed to you before you use a credit card.
The Annual percentage rate, or APR, is disclosed to you when you apply for a card, again when you open the account and it is also noted in each bill you receive. It is a measure of the cost of credit, expressed as a yearly rate. The Annual percentage rate concept can also be applied to savings accounts.
Credit card companies disclose the interest rate in several ways, but you want to look at the Annual Percentage Rate. This is the amount of interest, transaction fees and other charges that you will pay per year, expressed as a percentage. It is the best indicator of the actual interest you will pay.
Moreover the annual interest rate takes costs into account.
For instance with a one-time fees of $1000 paid in advance, $100,000 is borrowed. In this case if $946.01 is paid as equal monthly payment against 9.569% compounded monthly then it takes 20 years to give the loan back. If the $1000 one-time fees are taken into account then the yearly interest rate paid is effectively equal to 10.31%.
About the Author :-
Usha pradhan has completed her MBA in finance sector and currently working as financial author for cash loan by phone. She is contributing her knowledge on loan, cash loan, Annual percentage rate, unsecured loan, Bankruptcy. To know more about her please visit website
www.cashloanbyphone.com.
