What Does APR Mean For Loans

By David

APR (annual percentage rate) seems simple enough. You borrow “x” amount of money and you pay “y” interest on that money. However, it is never that simple and answering the question “what does APR mean for loans?” is no exception to the rule.

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APR

Before we can get down to answering the question “what does APR mean for loans?” we first need to take a look at what APR is. As you are likely aware, APR stands for Annual Percentage Rate, and as it implies, this is the amount of interest that you will have to pay on your loan each year it is being borrowed for. APR is typically a pretty good metric for comparing one loan to another, however there are other considerations that should also be taken into account.

How it is calculated

Now that we know what APR is we can take our next step in answer the question “what does APR mean for loans?” by taking a look at how it is typically calculated. In the average loan you will be making payments on a monthly basis. This means your APR will typically be divided by 12 (the number of months in the year) and assessed with your payment each month. So let’s take a look at how that would be calculated. Let’s say you got a loan for $100,000 with an APR of 5% that you were going to pay off in 10 years, we would first need to find out how much interest we would be paying for the first year of our loan, so we multiply our interest rate by the amount borrowed. The equation will look like this: 0.05*100,000 = 5,000. We then take this result and divide it by 12 (the number of months we will be paying on the loan this year) to find out how much interest we will be paying each month. That equation will look like this 5,000/12 = 416.67. This means each month we will pay $416.67 in interest. Now to find the principle we will pay each month, we need to divide the borrowed amount by the number of months in the full term of the loan. The equation will look like this: 100,000/120 = 833.33. Finally, we add our principle and interest together and get the monthly payment. The final equation will look like this: 833.33 + 416.67 = 1,250 or $1,250 each month. To find your payments for subsequent years follow the same procedure, but replace the total borrowed amount with the remaining unpaid amount in each instance.

Other considerations

When shopping around for the right loan, even though APR is a good measuring stick for comparisons, it is not the only thing that should be considered. Often, there are other fees and expenses associated with the loan application process that should be factored in before choosing which loan to go with. These fees will tend to vary from business to business so be sure to keep an eye out for them.

With the information above, you should be able to make an informed decision about what loan is right for you.

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