Annual percentage rate, APR for short, is a number that represents the total cost of borrowing money from a lender.
With installment loans, the APR incorporates the interest the lender charges, plus fees and other costs. The resulting rate helps you determine how much the loan will actually cost you each year.
It is thus important as you shop around for loans, to understand how to calculate APRs and compare them between various lenders.
How is APR Calculated for Loans?
Remember, the interest rate is what the lender charges to allow you to use its funds. But it's not the only cost associated with borrowing. Depending on the type of loan, the APR calculation may also include various other fees you'll be charged.
Basically, loans APR encompasses the total cost of the debt including the lender fees and other charges you may need to pay to secure the loan.
For instance, refer to the below screenshot to understand how OPesa Loan app calculates its APR.
Also, some personal loans like the ones you get from digital lenders carry an origination fee, which is deducted from your loan proceeds before you receive them.
A loan APR takes these additional costs into account, which is why the APR is typically higher than your interest rate.
Improve Your Credit to Qualify for Lower Rates
Lenders consider more than just your credit score when determining your loan APR. But the better your credit history looks, the higher your chances of scoring favorable in terms of getting the best APR possible.