What is APR? Understanding How APR is Calculated

Personal Finance

Financial firms will charge you an APR when you borrow or invest money. It’s the interest that a lender charges on a loan over a year. The Annual Percentage Rate is shown as a percentage of the amount borrowed, and the borrower must pay both the principal amount and the APR. The APR is a way to figure out how much a loan will cost you over a year. It shows the loan’s annual interest rate, processing fees, penalties, and other costs.

What is APR or Annual Percentage Rate?

The annual percentage rate (APR) is the amount of interest added to a loan or investment every year. It is shown as a percentage of the loan amount, expressing the total yearly cost of borrowing money. This includes any fees or extra transaction costs without considering the yearly compounding of interest. The APR gives you a single number to compare different loans, credit cards, or investments.

Importance of Annual Percentage Rate

One of the most important things to look at when getting a loan is the interest rate. Because of this, you will be drawn to the banks with the best APR. Before you take out a  loan from a bank, you should carefully consider all of the fees, even if they seem minor. 

APR makes it easy to see how much a loan costs. Its primary goal is to assist you in comparing loans better. But it’s important to remember that APR doesn’t consider compounding and doesn’t work for loans with changing interest rates. So, knowing the annual percentage rate (APR) allows you to evaluate loans beyond the total cost. 

How Does APR Work?

The APR is an excellent way to determine how much a loan will cost.

Let’s say you have taken a loan of $25,000 with an APR of 5% for five years. That means you will have to pay $470 every month. This payment goes towards both your principal and interest. As the months go by, the monthly amount remains the same, but the percentage breakdown that goes towards the principal and interest changes. You will begin paying less interest. In this case, you will pay $3,306.88 in interest in total.

How to Calculate APR?

The annual percentage rate varies from bank to bank. You can use the APR calculator to figure out the annual percentage rate that the bank charges for a loan. If you don’t have a calculator, you can use a simple formula to figure it out by hand.

Steps for Computing APR

The two most important parts of the APR are the loan fees and the compound interest rate over the year. Based on these factors and the terms of the loan, you can easily calculate the APR using these simple steps:

  • Find the rate of interest.
  • Add administrative fees to it.
  • Divide it by the principal amount.
  • Divide it by the total number of days in the term of the loan.
  • Multiply the amount by 365.
  • To convert it into a percentage, multiply it by 100.

The Formula

You can calculate the APR of a loan using this basic formula 

APR= [{(Fees + Interest)/ Principal}/ n]365*100


Interest = Total interest paid over the duration

Principal = Loan amount

n = Number of days in the loan term

The Best Way to Reduce Your Current Loan’s APR 

People who already have loans may want to bring down their APR. If it is high, the monthly interest payments will be high. Since APR is the loan’s interest rate, lowering it could make EMI payments less each month. Here are some ways to bring down your APR:

Improve credit

The APR of your loan is based on your credit history. Check your credit report before you talk to a lender. If you have bad credit, it’s unlikely that you’ll get a lower APR. Loans with high interest rates go to people who are a risk. So, to lower your APR, you should raise your credit score.

Pay Promptly

Borrowers must show that they are good at paying back loans and managing their credit if they want a lower APR. Banks only give lower rates and fees to people who pay their bills on time. It shows a customer’s creditworthiness. You must be a responsible borrower who makes timely payments to get a lower APR. Once you prove you can be trusted, the bank might lower your APR.

Discuss with the Lender

If you don’t have a good credit score but still want to lower your APR, talk to the lender and tell them why it’s crucial. If you pay your EMIs and other bills on time, the lender may lower your APR. The lender may agree to your request if you are honest about being sick, losing your job, or hurting your finances.

Transfer loans

If your bank or lender doesn’t offer a lower annual interest rate, you can move your money to a different bank that does. With this choice, you can switch your loan to a bank with a low-interest rate. Some banks charge fees for transferring balances, while others don’t. The APR will go down when you switch to a bank with a lower interest rate.


APR is an important number to keep in mind when choosing a loan. It gives you a clear idea of how much the loan will cost, so you can plan how you will pay it back. It is also very helpful when comparing loans since the APR lets you choose the loan that will cost you the least. So, make sure you figure out the APR of the loan so you can pick the best one.

Piramal Finance is a great financing option for everyone. Visit their website to learn more about the products and services they offer.