When it comes to taking a personal loan, interest rates are considered to the most important driving factors. However, the numbers always seem to be confusing and borrowers often find themselves amidst a series of questions that remain unanswered, until now. Standard interest rates are compounded on a monthly basis. However, interest rates can also be expressed using Annual Percentage Rates or APRs. These rates are calculated annually.
APR is one of the most commonly used yardstick methods for borrowers who want to know how to calculate interest rate on a loan. APR includes the total interest paid over the tenure of the loan and all peripheral processing fees incurred by the borrower. As a result of this, borrowers find it easier to select which personal loan costs them the least by comparing the Annual Percentage Rate.
What is the difference between Standard Interest Rates and APR?
The standard interest rates applicable on your personal loan are compounded on a monthly basis for tenure of the loan. This rate of interest is not inclusive of your bank processing fees, foreclosures, penalties (if any) and other fees pertaining to your loan. This is simply the rate of interest (compound) that you will be paying on your loan. Choosing a low rate of interest is essential to making the most out of your personal loan. This notion can be misguided by the idea that the lower the rate of interest, the lesser the amount you will have to incur at the end of your tenure.
However, it is important to note that the tenure of your loan will ultimately determine how much interest you’re paying in rupees. Moreover, this rate of interest will not take into account any additional charges that you will have to incur. Conclusively, standard rates of interests are good preliminary loan interest calculators.
Annual Percentage Rates (APRs) on the other hand include not only the standard rate of interest that will be incurred by you, but you will also understand how much money you will be liable to pay in terms of processing fees, transaction fees and other applicable charges. All the aforementioned elements are summed annually to help you understand how much amount you will be paying in a year for your loan. If your lender does not apply any other charges to your loan (no penalties, no foreclosure charges, no processing fees, etc.), then the following will be applicable:
APR = Standard Rate of Interest (in case of no additional charges/fees)
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