The full form of APR is the Annual Percentage Rate. It is the annual interest rate you pay on a loan or the interest you get on your savings account. Any mortgage, loan, or credit card will have an annual percentage rate or APR.
The APR provides you as a consumer with a final cost that you would incur if you borrowed money from that specific lender. As a result, before borrowing money, you can compare APRs across lenders. Consumers may find it challenging to compare this annual rate of interest, as lenders have the authority to determine which fees are included in the calculation rate. Before entering into any arrangement, every financial institution is required to disclose its annual percentage of interest.
Types of Annual Percentage Rate
On the basis of consistency, APR is divided into two types – Fixed Annual Percentage Rate (Fixed APR) and Variable Annual Percentage Rate (Variable APR).
Fixed Annual Percentage Rate
The term “fixed annual percentage rate,” or “fixed APR,” signifies the case when the interest rate that you have to pay remains consistent during the course of the loan. Lenders are required to notify borrowers in advance of any changes to the annual percentage rate (APR) while the APR is fixed.
Variable Annual Percentage Rate
The Variable annual percentage rate or variable APR is the complete opposite of the fixed annual percentage rate. The interest rate you pay on your loan will fluctuate throughout the course of the loan if the annual percentage rate, or APR, is variable.
How to Calculate APR?
APR is calculated using a simple formula. It entails multiplying the periodic interest rate by the quantity of time the rate is applied during the course of a year. Mentioned below is the formula used to calculate APR: