While availing a personal loan, you should make a note of various important factors such as the interest rate, loan tenure, and flexibility in repayment. Also, you should have a good amount of knowledge about the Annual Percentage Rate (APR) before opting for a personal loan. It has been observed that a lot of first-time loan borrowers confuse APR with the standard rate of interest. This can lead to inconvenience in the later stage. Therefore, it becomes essential to have a deep understanding of the Annual Percentage Rate.
What is Annual Percentage Rate?
As the name suggests, Annual Percentage Rate (APR) is the annual rate that is levied by a bank or any financial institutions for borrowing a loan or earning through an investment. In simple terms, APR is the interest applied to the total loan amount borrowed by an individual in a year.
APR is expressed in the form of percentage and is applicable to all the financial products borrowed by the customers. This percentage denotes the real cost of the loan across a year and borrowers need to pay this amount annually to the financial institutions from where they have procured the loan. APR consists of the actual interest rate, the processing fee, foreclosure amount, and all other fees charged by the financial institution on the loan.
How to calculate APR?
The APR of a personal loan can be easily calculated with the help of the APR calculator. However, if you don’t have access to the APR calculator, you can calculate it manually using the following formula:
Annual Percentage Rate = [2 x Number of Payments per Year x Total Finance Charges] / [Original Loan Proceeds x Total Number of Payments + 1]
Since the APR is based on the interest rate and other charges levied by the loan provider, it differs from one financial institution to another. This is why borrowers must know how much APR they have to pay against a loan from a financial institution before signing the final document.
How to avail a personal loan at low APR?
A personal loan with low APR can help you save a large amount of money in the long run. Low APR will allow you to cut plenty of interest from the EMIs that you need to pay throughout the year. Below are some of the ways to get a personal loan with low APR from leading financial institutions.
Improve your credit score
Banks and other leading financial institutions check your credit report offering you a personal loan. If your debts are under control and you have a high credit score, financial institutions would consider you a credible borrower with good repayment capacity. A good credit score increases the chances of your loan approval. Moreover, with a high credit score, you can negotiate with the loan provider for getting better APR on the loan.
Opt for a floating interest rate
If you opt for floating interest rate while taking a loan, financial institutions will show high interest to grant you a loan as that is more profitable for them. Taking this as an advantage, you can negotiate with the loan provider to reduce the APR on your loan.
Compare various financial institutions
As the APR varies from one financial institution to another, comparing various loan options will allow you to settle for the best deal.
Lastly, don’t forget to read the terms and conditions carefully before signing the loan agreement.
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