Annual Percentage Rate (APR)
Annual percentage rate (APR) is a standardized way of expressing the annualized cost of borrowing money as a percentage. It reflects the total cost over a year, including not just the interest rate but also other associated fees or costs.
Because a loan with a low-interest rate but high fees might have a higher APR than a loan with a higher interest rate but fewer fees, it’s useful to look at APR to get a more accurate picture of what you’ll pay compared to just looking at the interest rate alone.
The formula for APR is slightly more involved than nominal interest rate calculations because it includes both interest and certain fees, such as origination fees).
Here’s a general formula you can use to calculate the APR based on loan details:
APR = ((I + F) ÷ (P × n)) × 100
Where:
I is the total interest paid over the life of the loan.
F is the total fees charged (if applicable).
P is the loan principal (the original amount borrowed).
n is the loan term in years.
APR does not include the compounding effect of interest when it applies, but it can help you compare different financial products more easily, as it provides a standardized way of presenting the cost of borrowing over time.
The effective annual rate (EAR), also known as effective APR or effective interest rate (EIR), takes into account the effect of compounding.
Financial Glossary
Use Lighter Capital's glossary to understand common terms used in finance and investing, so you can build financial literacy and make informed decisions for your startup.
Annual Percentage Rate (APR)
Annual percentage rate (APR) is a standardized way of expressing the annualized cost of borrowing money as a percentage. It reflects the total cost over a year, including not just the interest rate but also other associated fees or costs.
Because a loan with a low-interest rate but high fees might have a higher APR than a loan with a higher interest rate but fewer fees, it’s useful to look at APR to get a more accurate picture of what you’ll pay compared to just looking at the interest rate alone.
The formula for APR is slightly more involved than nominal interest rate calculations because it includes both interest and certain fees, such as origination fees).
Here’s a general formula you can use to calculate the APR based on loan details:
APR = ((I + F) ÷ (P × n)) × 100
Where:
I is the total interest paid over the life of the loan.
F is the total fees charged (if applicable).
P is the loan principal (the original amount borrowed).
n is the loan term in years.
APR does not include the compounding effect of interest when it applies, but it can help you compare different financial products more easily, as it provides a standardized way of presenting the cost of borrowing over time.
The effective annual rate (EAR), also known as effective APR or effective interest rate (EIR), takes into account the effect of compounding.
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