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APR Formula:
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APR (Annual Percentage Rate) represents the true cost of borrowing money, including both interest charges and fees. It provides a standardized way to compare different credit offers and loan products.
The calculator uses the APR formula:
Where:
Explanation: The formula calculates the annualized cost of borrowing as a percentage of the principal amount, accounting for both interest and fees over the specific loan period.
Details: Understanding APR is crucial for comparing different credit offers, budgeting for loan costs, and making informed financial decisions. It helps borrowers identify the true cost of credit beyond just the interest rate.
Tips: Enter all amounts in currency units, ensure the loan term is in days. All values must be positive numbers with principal greater than zero and term at least 1 day.
Q1: What's the difference between APR and interest rate?
A: Interest rate only reflects the cost of borrowing the principal, while APR includes both interest and additional fees, providing a more comprehensive cost measure.
Q2: Why is 365 used in the formula?
A: 365 represents the number of days in a year, which annualizes the rate to make different loan terms comparable.
Q3: What fees are typically included in APR?
A: Common fees include origination fees, processing fees, and other lender charges, but not all fees may be included (check with your lender).
Q4: Is a lower APR always better?
A: Generally yes, but also consider other factors like loan terms, prepayment penalties, and your ability to make payments.
Q5: How does APR affect monthly payments?
A: Higher APR generally means higher monthly payments, as it increases the total cost of borrowing that gets distributed over the loan term.