An Annual Percentage Rate (APR) is the percentage number used to show how much you will to pay in interest to borrow money. It’s sometimes also called the cost of loan, yearly percentage rate, or even the interest rate comparison. Most often, you see this number when reviewing mortgages, automobile loans, credit cards, or lines of credit from a bank or other financial institution. By understanding what goes into APR calculation, you can make better finance decisions for your business.
An APR is a representation of the interest rate you’ll pay, but it also typically includes fees or other costs you need to pay on the loan you’re trying to get. Because of this, it’s a great way to compare financial products. The lower the APR, the less interest you’ll pay on the money you borrow. If you are seeking a line of credit for your business and two different banks quote you 10% APR and 13 APR, respectively, the first bank is offering you money at a cheaper cost.
APRs are usually calculated by first using a base interest rate and then adding in the extra interest and fees the financial institution wants to charge you. The base interest rate may be Bank of Canada’s interest rate, the London Inter-Bank Offered Rate (LIBOR), or another major base interest rate. For example, assume the Bank of Canada’s interest rate is 1.5%, the financial institution you are getting a loan from charges 5% interest, and the fees involved with the loan are 1% of the total. The APR on this loan is 1.5 + 5 + 1, or 7.5%.
Looking at an APR is a great way to see how much in interest you will pay to take out a loan. To be safe, always read the fine print of the loan deal to be sure you know what factors are included in that financial institution’s APR calculation.