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How Is Annual Percentage Rate (APR) Different From Simple Interest Rate?

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Anonymous Profile
Anonymous answered

Interest rate is the percentage of the loan amount that is charged for borrowing money. The Annual Percentage Rate(APR) is a calculated rate that not only includes the interest rate
but also goes into account other lender dues required to finance the
loan.

mahendra kumar Profile
mahendra kumar answered
The Annual Percentage Rate takes in to account the overall extra costs that go in to processing a loan and is different from the simple interest rate that takes in to account only the face amount of the loan. It does not affect the monthly payments that one has to make but gives a correct and accurate picture of how much a loan would cost in actual terms taking in to consideration hidden costs like points, mortgage insurance, and loan application fee among others.

A rough guide to calculating APR would be subtracting the simple interest that one would accrue at the end of the term and then dividing the interest amount by the subtracted amount.

For example if one borrows $1000 at 10% simple interest rate for 1 year then the simple interest accrued would be
Simple Interest = 1000 * 0.1 * 1 = 100
The amount of simple interest subtracted from the principal amount would give us $900.

The annual percentage rate in this case can be calculated as
APR = 100 / 900 = 0.111 = 11.1%

Thus it can be observed that the APR would be higher than the simple interest rate though in practice the duration for which the loan is taken and the total extra costs are better yardsticks to make sense of the APR with respect to overall repayment.

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