What to Do
APR is calculated using the following formula:
Where i is the quoted interest rate (expressed as a decimal) and m is the number of terms (compounded) per year.
Example:
Suppose a bank account pays interest quarterly, at the rate of 5%. APR is therefore:
What You Need to Know
- APR tends to be a little higher than the rate of interest quoted.
- Interest must be expressed as a decimal when using the formula.
- There may be other costs involved in taking out a loan, not just APR. For example, some lenders may charge arrangement fees, annual fees, settlement fees and penalties for late payment (or even for paying off the loan early).
- Lenders must provide information about APR to borrowers, so it’s a good evaluative measure for comparing loan or mortgage rates.
- APR is also known as “annual percentage yield” (APY) in relation to investment.
Where to Learn More
Web Site:
Investorguide.com: www.investorguide.com
