What is APR?
Banks often quote interest rates for investment or borrowing with Annual Percentage Rate (APR), which indicates the amount of simple interest earned from an investment in one year or the cost of a loan, that is, the amount of yearly interest earned without the effect of compounding. APR includes fees or transaction charges, if any, associated with the principal. Because it does not include the effect of compounding, the APR quote is typically less than the actual amount of interest that you will earn or have to pay.
APR provides a bottom-line number that customers can use to compare among lenders, investment products or credit cards.
How Is APR Calculated?
Where is the number of days in the loan term.
APR is calculated by multiplying the periodic interest rate by the number of periods in a year it was applied. It does not advise how often the rate is applied.
What Is Representative APR?
Another related term is the Representative APR, typically seen quoted for credit card products. It means that 51% of the customers receive a rate that is at least the same or lower than the Representative APR, but it does not guarantee that an individual customer will receive that rate. An individual potential customer will be given their own APR based on how the lenders assess the customer’s circumstances and credit score.
In the UK, banks often use the Annual Equivalent Rate (AER) for savings accounts and APR for debts.