The interest rate is the principal loan amount, it is the cost of borrowing money. On the other hand, APR includes other cost that are associated with the loan.
Interest Rate Vs APR: an overview
Consumer comparison to determine the affordability of any loan opportunity both the APR and the interest rate of such loan much be put into consideration. When taking a mortgage the interest rate and the APR are numbers that reflect the costs. Although both described the cost of payment but they’re not the same thing.
It is the advertised rate or a nominal interest rate, it is use to calculate the interest expense on your loan. For instance, when getting a mortgage loan up to $200,000 with 6 percent interest rate, the annual interest expense would be $12,000, or a monthly payment of $1,000
Annual Percentage Rate (APR)
It is the Annual percentage Rate that must be put into consideration when comparing loans. It includes not only the interest expense on the loan but also all the fees and other costs, discount points, and rebates are inclusive. These are express in percentage.
It is gives you a deeper comprehensive look on the amount to be paid when you go borrowing money for a loan.
APR is usually greater than or the are equal percentage with the nominal interest rate, otherwise in the case of a specialized offer where the lender is offering a rebate on a portion of your interest expense. For example, consider the Point that making your home purchase also requires a closing costs, mortgage insurance and loan original fees in the amount of $5,000. However, to determine your mortgage loan’s APR, these fees are included in the original loan amount to create a new loan amount to create a new loan if $205,000. However, to calculate APR, simply divide the annual payment of $12,300 by the original loan amount of $200,000 to get 6.15 percent.
Furthermore, it must be noted that, APR usage comes with conditions, and lenders services costs are inclusive in the APR and are spread across the loan life. Sometimes even up to a long period of years, refinancing or selling a home can raise the cost of a mortgage than the original price by the APR. APR limitations is also lack of being efficient in getting the real cost of an adjustable-rate mortgage since the future direction of interest rate is unpredictable.
How To Calculate Interest To APR
Often times, lenders always made available the APR on your application of a loan. Most cases, only interest rate are given. Perhaps you only have interest rate but know that you’re paying more in fees, then get to know your APR value or percent. However, if you want to do that personally, use a spreadsheet formulas and online loan calculators to plug in the numbers that you know. To calculate your APR here is what you must know:
- The total amount you intend to borrow
- The interest rate of such loan
- The repayment terms
- The cost of any fees.
Here is how to put all your information together to turn your interest rate into your APR. Let’s assume you are borrowing $10,000 and you’ve been quoted an interest rate of 12%. You are paying closing fee of $500. The APR of your 2 year loan would be roughly 16.92%
Steps To Calculate APR
Key in the following formula into any spreadsheet cell to calculate the monthly payment for your loan:
=PMT(Interest rate/months, total numbers of months you pay on the loan, loan value us fees)
Therefore your monthly payment would be $494.27
After, you have gotten the monthly payment, let’s determine the APR
=RATE(Total number of months you pay on the loan, your monthly payment shown as negative, and the current value if your loan)
You can express it thus:
You will have a monthly rate of 0.0141.
Here to get you’ll have to multiply your monthly rate (0.0141) by 12 to get the annual rate
0.0141* 12 =0.1692
Your annual rate is = 0.1692
Finally, to express your annual rate in percentage form, multiply by 100 to convert from a decimal point into a percentage
0.1692 * 100 = 16.92%
Therefore your APR is 16.92%
Now that you have work out, your APR, you’ve seen that your original interest rate of 12% does not really reflect the actual rate you get when you consider the fees you’ll pay. Instead of 12% interest rate, you are going to pay.