APR

APR or Annual Percentage Rate on a loan shows how much money the borrower will have to pay to the lender each year. It is calculated according to the APR formula that includes:

Loan interest;
Various fees that accompany the loan;
Principal;
Loan term.

Why Borrowers Should Know the APR

When comparing online loan offers from different lenders, borrowers often make a conclusion based on the interest rate. However, this is a wrong strategy, since lenders often understate the interest rate to attract customers. At the same time, they increase standard fees, such as the origination fee. In this case, borrowers, based on the interest rate, think that they are taking a cheaper loan. But in fact, they will pay more due to high fees. Only by comparing loan offers using the APR can you make an objective conclusion.

How Your Loan’s APR May Differ from the Representative APR

Lenders provide loans for bad credit on an individual basis because each borrower has their unique circumstances:

Credit score;
Salary level;
Duration of employment at the current place of work;
Availability of a guarantor or property for collateral, etc.

The specific loan offer that the borrower receives will be based on an assessment of these and other factors. This means that the APR for your loan will be individual. However, to advertise their services, lenders use the representative APR. It means that at least 51% of the lender’s clients receive a loan with the specified APR:

Applicants with a very good credit history will receive a loan with an APR lower than the representative APR.
Those with a bad credit history will get a loan with a higher APR.

The Formula for Calculating the APR

Most lenders offer calculators on their websites to figure out the APR. But if you want to calculate this value yourself, use the following algorithm:

First, you need to calculate the periodic interest rate. To do this, add up the total interest that you will pay throughout the loan repayment period and all standard fees. Divide this amount by the loan principal and then divide the remainder by the number of days of using the loan.

It will look like this: ((Total Interest + All Fees) / Principal) / Number of days of loan repayment

Second, multiply the periodic interest rate by 365 days. To get the APR as a percentage, multiply this number by 100.

It will look like this: (periodic interest rate x 365 days) x 100 = APR

Example of APR Calculation

Let’s suppose that you want to borrow $5,000 for 36 months at 10% and an origination fee of $100. In this case, your APR will be equal to 10.67%

APR=(((1,500+100) / 5,000) / 1,095) x 365 x 100 = 10.67%

Knowing this formula, you can easily calculate the APR for lending products. It will help you objectively compare different credit offers and make the right decision.