What is the APR

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He APR is the Equivalent Annual Rate and it is used to calculate the cost or profitability of a loan, mortgage, savings products.

It will help us to know the financial cost of a one-year operation with a single payment at the end of the period. In other words, it is the real yield of a financial product since it includes the nominal interest rate, the term of the operation and the expenses generated in commissions.

What is it for

It will mainly serve to Compare loans and offers of financial products. It is a unified indicator that helps many consumers and companies to avoid having to develop complicated calculations to decide on one or another product.

Helpful examples:

  • we can compare the financial cost of a credit policy with quarterly settlements, with the cost of another one year with monthly settlements, because the APR allows transforming both operations into one with the same financial characteristics.
  • We will be able to know if an operation that a priori seems economical is or not. For example a promissory note discount.
  • Know if a bank factoring is expensive or not

What influences the APR:

Product period and its commissions

The shorter the term of the operation, the higher the APR since the commissions that must be paid will be the same. In other words, a 1-year operation will have an APR of 7% and that same operation with a 5-year period will have an APR of 5,55%.

Settlement periodicity

The settlement period, whether monthly, quarterly, semi-annual or at maturity, has a direct effect on the APR. The same nominal annual rate (TNA) gives rise to different APR values depending on the number of capitalizations produced within the year.

The type of loan

The amortization method also affects the calculation of the APR since in the different types of amortization it is settled in different periods.

Tips:

  • It will serve to compare loans or products with the same term period.
  • The APR of a fixed rate operation will never be compared to that of a variable rate.
  • There are bank of Spain simulators that help you calculate: simulators 
  • Remember that the TAE effect can be surprising for operations that, a priori, seem economical.

 

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