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What is APR - Annual Percentage Rate?

What is APR

Individuals planning to avail themselves of a loan must make themselves aware of the concept of APR or Annual Percentage Rate. Understanding the concept of APR allows borrowers to plan their finances well and in advance and pay off the loan easily. However, most borrowers in India are completely unaware of what an APR is, and will benefit immensely from their knowledge of APR.

Annual Percentage Rate Meaning

The annual percentage rate or APR is the yearly interest accumulated on the fund borrowed by a borrower. In simple words, every time a borrower borrows money, they must pay the cost for borrowing money in the form of interest and the annual percentage rate is the percentage of the total interest that a borrower must pay over a loan. APR takes into account all the fees and charges associated with a loan. However, it does not take into account the concept of compounding.

APR is an important concept as it allows borrowers to understand the total cost of funds for the entire duration of a loan. Thus, when borrowers understand and compare the concept of APR, they get a very clear idea of borrowing from which lender will be most beneficial for them.

How is APR Calculated?

Let us understand the concept of APR further with this example. Let's assume a borrower decided to borrow Rs.25 lakh as a loan to buy a home and this loan was extended at an interest rate of 7% for 20 years. The borrower will now have to pay Rs.19,832 as EMI every month. However, the borrower must understand that the monthly payment that they make will go towards covering the principal loan amount as well as the interest due on the loan. With time, though the monthly payment will remain the same, the breakdown of the total amount going towards the principal and the interest will change. Initially, a major chunk of the total EMI will go towards covering the interest component of the loan. However, as time progresses, the interest component of the EMI will go down and the principal component will go up. The total interest paid by the borrower, in this case, is Rs.21,51,392. When we combine this total interest paid with the fees and charges applied by the lender over the loan and divide the amount received by the total loan value, we get the annual percentage rate.

How Does APR Work, and What is its Importance?

Borrowers must also know that the annual percentage rate is of two types: fixed and variable. In the case of fixed APR, the annual percentage rate remains fixed through the duration of the loan. However, in the case of variable APR, the annual percentage rate can change anytime. Borrowers must also know that lenders have the right to change the APR as and when needed. However, they must inform the borrowers about this change in advance. Further, borrowers must also know that lenders cannot keep the APR hidden -- they must disclose the APR on the loan agreement.

If you are planning to take a home loan in India, apply with Bajaj Housing Finance. We not only offer loans at the low interest rates but we also maintain full transparency with respect to fees and charges. Therefore, when you borrow from us, you know for sure what will be the total cost of the loan and have all the information you need at your disposal to make the right decision.