APR, or the Annual Percentage Rate, on a personal loan, highlights the total cost of borrowing money. APR in personal loans combines the interest rate you are offered with a personal loan with any fixed fees, including the lender charges or origination fees.
APR in personal loans is one of the most crucial factors when comparing personal loan offers from different providers or lenders. If there is a major difference between the APR and the interest rate offered, this indicates the lender’s fees might be expensive.
APR tends to vary depending on the lender you select, the amount you will borrow, your repayment term, and your credit score.
What is APR and Why Does It Matter?
APR, or Annual Percentage Rate, is defined as the yearly interest generated by an amount that is charged to borrowers or paid to the respective investors. APR is depicted in the form of a percentage representing the actual annual cost of funds over the given loan term or income earned on the investment.
This includes additional costs or any fees linked to the transaction but does not consider compounding into account. The APR offers consumers a specific number they are able to compare among credit cards, lenders, or investment products.
A lender will depict the actual cost of the loan or the actual percentage rate of the personal loan for one year. You will pay this amount annually to the lender once your loan is approved.
How is APR Calculated on a Personal Loan?
When it comes to calculating APR, lenders start by considering the interest rate you are provided. Eventually, the lender will add the finance charges. The finance charges for a personal loan usually include administrative fees and origination fees depending on the percentage of the loan amount.
Most lenders list the respective APRs online. Ensure that you go through the small print to understand all applicable fees.
If you wish to calculate the APR yourself, here are some steps to follow:
- Depict the interest rate in the form of a decimal (dividing the same by 100).
- Multiply the rate by the principal amount you are borrowing.
- Multiply the obtained number by the loan term (in years).
- Add up the loan fees.
- Divide the obtained number by the respective loan amount.
- Divide the obtained number by the total number of days in the respective loan term.
- Multiply the same by 365.
- Multiply the same by 100 to obtain the APR.
Why is APR Important When Taking a Personal Loan?
APR features its own set of benefits over the standard rate of interest on a personal loan. Here are some benefits of APR when taking a personal loan:
1. APR serves as a standard calculation tool that offers an accurate number. Using this tool, borrowers can effectively compare the interest rates charged by different lenders and come across the cheapest and most competitive personal loans in the market. APR features different types of fees and charges that are available with the financial product without compounding.
2. Loans and other financial products vary from one lender to another. The variation could be on grounds of the fee structure, interest rates, penalties, charges, waivers, and several other aspects. APR serves as the standard figure. Therefore, the concept makes its simpler for borrowers to assess how much they are expected to pay against the personal loan along with the best choice of the lender.
3. As APR features all charges and fees and not just the interest rates applicable to a personal loan, it assists customers t o analyze the actual cost of the personal loan in a better way. This tool allows you to obtain the exact figure. In turn, this makes it easier to analyze the loan repayment capacity beforehand.
4. When you obtain quotes from different lenders with varied charges and rates, it becomes difficult to come across the most economical lender. A low-cost personal loan can make you pay more in the long run. On the other hand, a high-cost loan can help you save significantly.
What Affects Your Personal Loan APR?
The APR can vary depending on several factors. These factors tend to determine the amount you will end up paying in the form of loan fees and interest rates. Some factors to consider are:
- The credit score
- Loan term and amount
- DTI or debt-to-income ratio
- Lender’s policies
- Loan type
- Market conditions
How to Get a Lower APR on Your Personal Loan
Personal loans are indeed useful when it comes to minimizing the financial burden of borrowers. However, this form of credit can be available with high interest rates. Therefore, you should try to get a personal loan with a low APR to save significantly. Some tips are:
1. Reveal Your Credibility As a Borrower: Lenders assess your credit history while providing access to a personal loan. When you maintain a high credit score and a minimum debt, you will be regarded as a credible borrower with impressive repayment capacities. In this manner, you can also negotiate on the APR.
2. Consider Your Valuable Assets: You can choose the option of a secured loan in comparison to an unsecured loan. This is because banks tend to charge lower interest rates on the loans acquired against some valuable assets. The interest rates become naturally low in this case as the overall risk is also less.
3. Apply with a Co-Applicant: When you apply for a personal loan with a co-applicant, the amount that is defaulted can be easily recovered by the bank from the guarantor.
Common Misconceptions About APR
It is quite common to misunderstand the concept of APR for personal loans.
- Borrowers feel that the APR and loan interest rates are the same.
- Another misconception is that all lenders offer the same APR. This metric tends to vary depending on the lender, the loan amount, and the credit score.
- Some borrowers assume that APR remains fixed for the entire loan term. Some loans can feature variable APRs as well
Conclusion
It is important for borrowers to understand the concept of APR for personal loans. APR depicts the true cost of a personal loan, including additional fees and interest rates. This helps borrowers compare different lenders effectively. While comparing lenders, Stashfin stands out in the sense is that it offers access to instant personal loans with the help of a mobile app.
Frequently Asked Question
What is a good APR for a personal loan?
Typically, a good APR tends to range from 6 percent to 36 percent. It will ultimately depend on the borrower’s income, credit score, and the lender’s policies.
How does APR affect my monthly EMI?
Your EMI can be directly affected by the APR, as the latter determines the exact cost of borrowing in a personal loan.
Can APR change after loan approval?
After loan approval, the APR remains the same in most cases. In the case of a variable-rate personal loan, you can expect variations.
Does a zero APR personal loan exist?
This type of loan is quite rare. Such loan options are offered in the form of promotional deals by some lenders for a limited period.
Are NBFCs offering lower APR than banks?
NBFCs tend to offer lower APR than banks. This holds true for borrowers with a strong credit history.