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Jan 29

APR, what it is and how it is calculated?

 

APR is the acronym for Annual Global Effective Rate and represents the final and actual expense linked to the request for a loan.

Also known as the Synthetic Cost Index ( ISC ) and represented as a percentage value, the APR includes in itself both the “pure” interest rate and all the ancillary expenses of a loan.

Use the APR to compare loans

Use the APR to compare loans

The main use that is made of the APR is that of comparison, that is of comparison between two loans to go in search of the most convenient. Generally speaking, we say that, among various loans, the one with the lowest APR will be the most convenient in terms of cost.

How is the APR calculated?

How is the APR calculated?

The calculation of the APR is slightly “complex” due to the fact that it also contains, as mentioned, all the accessory costs of the loan.

However, let’s take an example to better understand the concept (all the percentages and amounts indicated below are only examples, they may not show real values).

  • Loan amount: $ 10,000
  • TAN interest rate: 5%
  • Initial expenses: 100 $
  • Periodic expenses: $ 1 per month
  • Duration of funding: 60 months

The sum of the extra costs, calculated for the entire duration of the loan (60 months), is 160 USD which are added to the interest expense (equal to 1,322.74 USD).

The final cost of the loan will therefore be 1,384.74 USD, for an APR of approximately 5.78%.

As can be seen, the final expenditure is slightly higher than the nominal annual interest rate TAN only.

The APR according to the law

The APR according to the law

Italian law introduced the concept of APR for the first time in 2003, with Resolution no. 10688 of 4/03/2003, art. 9 paragraph 2, of the Inter-ministerial Committee for Credit and Savings, which pointed out to the Bank of Italy the need to identify an interest rate that could be representative of all the charges linked to a loan and which, therefore, would be been the expenses of a customer in applying for a personal loan.

Thus was born the APR, which is calculated by adding TAN + preliminary costs + practical management costs + compulsory insurance + state stamp.

The APR, on the other hand, never includes the taxes that must be paid on loans (such as registration taxes in the case of home loans) and insurance that are not mandatory.

Differences between APR and TAN

Differences between APR and TAN

The main difference between APR and TAN is clearly that of the type of costs that the percentage value represents. In the case of the APR, there is a more truthful indicator of the final cost of the loan and therefore this index is always preferable to the TAN in the loan installment calculation.

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