Annual percentage rate (APR) – What it means and how it works?
Annual Percentage Rate is one of the most important terms that you need to understand as a consumer. This is because it will help you know exactly how much you will be paying for a loan. This is why you need to know what APR is and how it works before taking a loan from any NBFC or Bank.
A loan with a lower interest rate is always said to be a good idea. However, this might always not be true due to various aspects that get added to the loan. When you calculate the interest cost, it does not reflect the actual cost of borrowing. Other costs involved in taking out a loan are not taken into account, so the final cost is much higher than the advertised interest rates. To avoid this discrepancy, APR can come to your rescue.
Lenders charge the Annual Percentage Rate as the annual interest rate on the total annual cost. It includes additional fees such as processing fees, insurance costs, and other additional costs, not including compound interest, which indicate the actual final cost of the loan.
There are two types of annual percentage rates of charge:
Personal APR: It is usually offered to a borrower depending on individual factors such as his financial capabilities, the amount of the loan and his credit history, and other factors.
Representative APR: The interest rate advertised by the lender means that approximately 51% of the company’s consumers will pay a similar amount, including all fees.
How Annual percentage rate (APR) Works?
Now that we know that APR includes all additional charges instead of just taking the interest rate, here is a simple example that will help you understand it better.
If you borrow an amount of 500 rupees and the interest rate is 25 rupees and a service charge of 7 rupees, we will get 32 rupees if we add the interest rate (25 rupees) and the service charge (7 rupees). This gives us an APR of 6.4% (if we divide all the additional costs of 32 Rs by the total amount borrowed of 500 Rs).
Here we have not only calculated the interest rate but also the processing fee which was an additional factor. Annual Percentage Rate takes care of all the additional costs.
NBFCs can offer loans at low Annual percentage rate (APR) based on:
Credibility: you always have a good chance of getting a loan if you have high credibility. If you have a high credit score and also your expenses are under control, this gives the impression that you will be able to repay the amount. Non-bank financial companies also check your financial history similarly to banks. If you have proven your credibility, you can negotiate a low APR.
Check with various NBFCs: Chances of getting loans at a low Annual Percentage Rate from NBFCs are higher than from banks. However, you need to research thoroughly and verify authenticity before approaching NBFCs. On a positive note, several such companies can offer these loans with greater flexibility.
Apply for a Loan with a Co-Borrower: If you apply for a loan with a co-signer, chances are higher that you will get the loan at a lower Annual Percentage Rate. Non-bank financial companies may charge a higher interest rate if you apply for a loan alone due to a lack of credibility. Having a co-signer increases repayment security, so you can get a low APR.
Evaluate Various Loan Options: In addition to thoroughly researching the different NBFCs you can choose from, it is also important to compare the different loan options. You do not have to commit to a specific loan but should talk to a representative to find out the loan option that works best for you.
Also Read: Flat Interest Rate vs. IRR
Conclusion
It is important to choose the loan with a low Annual Percentage Rate as it shows you the actual amount and helps you reap the complete benefits of the loan. This can be a good consideration for you to get how much loan you are eventually paying.
