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What is the difference between APR and interest rate ?  

0
Is there difference between apr and interest rate , I am a little confused with the concept, can some please explain.

Mac
 

asked Dec 22, 2004 06:32 PM

Anonymous
Best Answer
8
best answer

The apr would equal the interest rate if there is no additional cost to a given loan.

APR or Annual Percentage Rate is the also the equivalent interest rate considering all the added cost to a given loan.In reality, it is a fn(function) of the loan amount, the interest rate, the total added cost, and the terms.

APR=fn(C,R,E,N)

where
C is the total Loan Amount
E is the Extra Cost
R is Interest Rate %
N is the Number of Months


Monthly Payment P is calculated as


Quote:

(C+E)r(1+r)(*N*)
P= --------------------------
(1+r)(*N*) - 1


where (*x*) means to the power of x


The Annual Percentage Rate A (a = A/1200) can then calculated iteratively by simplifying the equation some neumeric methods like bisection or newton-raphson methods.

Let me explain with an example.

If
Loan Amount (C) = 10,000
Extra Cost (E) = 1000
Interest Rate % (R) = 10
Number of Months (N) = 100 months


Quote:
then apr will be : 12.69930 %
Monthly Payment: $ 162.56
Total Payment: $ 16255.88
Total Interest: $ 6255.88


while if
Loan Amount (C) = 10,000
Extra Cost (E) = 0
Interest Rate % (R) = 10
Number of Months (N) = 100 months

then

Quote:
APR: 10.00000 % (same as interest rate)
Monthly Payment: $ 147.78
Total Payment: $ 14778.07
Total Interest: $ 4778.07


This extra cost includes Points, application fee, closing fee, title fee,...

Hope this will be helpful, I hope to elaborate it more and in a much simpler way.

Keep posting and enjoy the forums.

Regards
Vikas

answered Dec 24, 2004 10:46 AM

7 Answers

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HI Mac,

Welcome to debtconsolidationcare forum and thank you for the visit.

An apr is the compounded rate used to give a standard comparison of the amount of interest you are likely to pay on loans or outstanding credit card balances, or can also be defined as a statutory method of calculating the annual percentage rate of charge to repay the total charge for credit over the period of the loan. Is commonly used to compare loan program from different financial institute or lenders. Whereas Interest rates can be termed as, "The monthly effective rate paid (or received if you are a creditor) on borrowed money. Expressed as a percentage of the sum borrowed."

Looking forward to more of your participation and suggestions in the forums. Wishing you a very peaceful and Joyous Christmas.

Regards,
Simon

answered Dec 23, 2004 01:41 AM

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The apr is used to measure the "true cost of a loan."

For e.g Leander A says to you I will lend you $100 at 6% interest rate and Lender B says to you I will lend you $100 at 8% interest rate.

Lender A says that the cost of the paperwork is $10
and Lender B says that the cost of paperwork is $4

Hence Apr for Lender A is 16%
And Apr for lender B is 12%

Hence Lender B is better then lender A though Lender B has a higher interest rate then lender A.

Apr creates a level playing field for lenders by preventing lenders from advertising a low rate and hiding fees.

The fees generally included in the APR calculation are:
* Discount points and origination points
* Pre-paid interest. The interest paid from the date the loan closes to the end of the month.
* Loan-processing and Underwriting fee
* Document-preparation fee
* Private mortgage-insurance

answered Dec 23, 2004 01:35 PM

Anonymous
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Vikas great post , but how to go with iterative process, can customer see some online iterative applications?

answered Dec 24, 2004 11:02 AM

0

You made my doubts clear , I will also appreciate a calculator to calculate apr.

Thanks
Mac

answered Dec 27, 2004 02:01 AM

Anonymous
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Mac ,

Thanks for the suggestion, we will make an apr calculator in a week's time and also we will post the link over here.

Please keep posting.

Thanks
Vikas

answered Dec 27, 2004 05:22 PM

0

this was good info I didn't know! Thanks!

answered Aug 6, 2008 12:05 PM

Anonymous
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this was good info I didn't know! Thanks!

that was me, I got logged out!

answered Aug 6, 2008 12:06 PM

1 

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