How to calculate APR or Annual Percentage Rate?

This is a complex topic with no standard definition. I have made every attempt to simply it to the maximum extent possible. The APR would equal the interest rate if there are no additional costs to a given loan. A typical loan of 100 pounds with an interest rate of 10% per year shall have an APR of 10% if there is no associated processing fee. But in practicality this is not so. The lender always charges a documentation preparation fee to securitize his loan. If the associated cost with processing the above 100 pond loan is 2 pounds than in practicality the borrower is getting only 98 pounds but being charged an annual interest of 10% or 10 pounds on a loan of 98 pounds. Therefore we back calculate the actual interest paid by the borrower on a loan of 98 pounds. The resultant interest from the back calculation is called APR which in this case shall work out to 13.8363 %. (Check the APR Solver) The detailed equated monthly payment of 8.79 pounds per month can be glanced here.

Annual Percentage Rate (APR) is a way to compare the costs of a loan. Although it’s not perfect, it gives you a nice standard for comparing the percentage costs on different loans. The annual rate that is charged for borrowing, expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional loan processing costs associated with the transaction. Unlike the interest rate charged by a lender the APR is designed to measure the "true cost of a loan." In other words it prevents lenders from advertising a low rate and hiding fees.

In order for the readers of this article to go into more details about different APR calculation I have intentionally kept the numerical figures same as demonstrated on Wikipedia.org.

"A 15 year mortgage and a 30 year mortgage with the same APR (10%) would have different monthly payments and a different total amount of interest paid. There are many more periods over which to spread the principal, which makes the payment smaller, but there are just as many periods over which to charge interest at the same rate, which makes the total amount of interest paid much greater. For example, $100,000 mortgaged (without fees, since they add into the calculation in a different way) over 15 years costs a total of $193,428.92 (interest is 93.430% of principal), but over 30 years, costs a total of $315,925.77 (interest is 215.925% of principal)."

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