While applying for a Personal Loan, whether it be an Emergency Loan, a Consumer Durable Loan or a Medical Loan, two terms frequently occur at the forefront for discussion: Annual Percentage Rate (APR) and Interest Rate. Often, these words are found manipulative to customers and are used interchangeably by many. However, knowing them separately is basic and important for users to make sound financial choices and understand the foundational cost of borrowing. This blog will help you to learn more about these two terms. Here’s how!
The best-known reasons to explain why the APR (Annual Percentage Rate) is generally higher than the Interest Rate.
Understanding the 2 terms: APR (Annual Percentage Rate) & Interest Rate.
What is the Annual Percentage Rate (APR)?
The Annual Percentage Rate (APR) is an inclusive term that reflects the borrower's Total Annual Borrowing Cost, expressed in a percentage rate. It includes the interest rate and other fees associated with the loan. Depending on the loan, it provides loan origination fees, processing fees, discount points, and others.
What is an Interest Rate?
The Interest Rate is the percentage the lender charges on the principal loan amount. It represents a fundamental cost that the borrower must pay for utilizing the lender’s funds. This rate excludes any extra fees or charges linked to the loan.
Basic reasons that make APR (Annual Percentage Rate) higher than the Interest Rate
The Annual Percentage Rate (APR) often provides a more comprehensive and realistic picture of the cost of borrowing than the interest rate. Understanding why APR is generally considered a better unit can enlighten your financial decision-making process:
Incorporation of Fees:
The most significant factor elevating the APR above the interest rate is including fees or charges. These costs are paid to obtain and maintain the loan, but they are not directly reflected in the interest rate. By blending these costs, the figure provides a more realistic picture of the cost of a loan. These include Loan origination fees, processing fees, discount points, and administrative charges.
Effect of Loan Term:
The impact of additional fees or charges on the APR also significantly depends on the loan term. For short-term loans, high upfront fees lead to a much higher APR because they are spread out for a shorter duration, increasing the annual cost.
Reflects accurate Cost of Borrowing:
APR reflects the actual cost of borrowing more accurately than the interest rate alone. This helps borrowers understand the definitive role of APR in their loan agreements.
Consumer Protection:
APR offers Consumer Protection by preventing lenders from advertising low interest rates while hiding high fees, which can significantly increase the cost of a loan.
Promotes Transparency in Lending:
APR helps maintain transparency by ensuring that all lenders calculate and disclose the costs of their loans uniformly. Such transparency is vital for maintaining ongoing trust between customers and NBFCs.
Conclusion
According to the court of law and RBI Rules and Regulations, lenders must disclose the APR to their borrowers. The above reasons are enough to explain the robustness of the APR while applying for a loan. It is the lender's responsibility to provide the users with adequate information and shouldn't mislead them through their loan journey. This will help the users understand their total loan costs and make better financial decisions.
At Chinmay Finlease Limited, we are committed to transparency in all our financial dealings. We provide accurate, precise, comprehensive information about APR and interest rates. When you apply for a loan through Chinmay, you can be confident that you will be equipped with all the information required to make the best decision for your financial well-being.
We encourage you to apply and explore loan options with Chinmay Finlease Ltd., where clarity, fairness, and customer satisfaction are priorities.
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