What is the APR or Annual Equivalent Rate?

The APR concept, also known as the Annual Equivalent Rate, shows the coste or effective performance of a financial product. Unlike the interest rate, the APR does include bank charges and fees in addition to the compensation received by the owner of the money (usually a bank) for temporarily assigning it.

The term APR contemplates the expenses and commissions that a banking product carries, allowing to homogenize any financial product over a period of one year in order to have the possibility of comparing it with another similar one of the same or another entity.

How to calculate the APR?

The APR formula to calculate this percentage takes into account the nominal interest rate of the loan (mortgage or personal), the frequency of payments (monthly, quarterly, annually, etc.), bank commissions and other income or expenses.

This formula does not include expenses that the client can avoid, such as transfer costs; those that must be paid to third parties, such as taxes and notaries; or insurance expenses. For its part, it does include premiums aimed at guaranteeing the entity the reimbursement of the credit in case of unemployment, disability or death when the entity imposes its subscription for the granting of the credit. Tax deductions are not taken into account either.

The APR formula would be the following:

TAE = (1 + r/f)f

In this case r is the nominal interest rate and f the frequency of payment of installments. The formula of the Annual Equivalent Rate allows us to obtain an annual interest calculation, incorporating the interests that are obtained monthly, quarterly, etc. at each new interest calculation.

The APR makes it easier for the client to compare the different p├ęstamos or investments, regardless of their particular conditions, since it manages to match the different elements of the operation. The Bank of Spain obliges banking entities to report on the APR, both in advertising and in the settlement documents and contracts that they provide to customers.

We can also use a online tool to calculate APR in very few steps and we will have a much more specific reference of the performance of a cash.

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