How is APR calculated

badbunny42

Hi
I know that this has probably been discussed about a million times, but I have had trouble finding the posts.
Can anybody explain how APR is calculated? I'm reasonably sure that it is the interest rate adjusted to include charges but my knowledge stops there.
Does it include late/non payment fees? or anything else? What period does it cover?

If anyone can help I'll be very greatfull

Thanks

zcaprd7

Nothing to do with late payment fees - just the annual interest you'll pay.

How could they adjust it to include charges you haven't had yet?

Robert_Sterling_3

You are right to say that it has nothing to do with late payment fees and your reason is also correct.

You are wrong to say that it is only to do with the annual interest that is the Annual Equivalent Rate or AER.

E.G. 11% interest per month, paid monthly, gives 12.8% AER.

The APR takes into account certain charges and the interest charged.

Puting Annual Percentage Rate into Google brings up all the juicy details.

RobertEdi

??? I'm still confused about how the interest is calculated. Tried Google but couldn't see a website that would compare the calculation.

Any ideas? I'm looking to confirm the amount of interest that should be charged on a £3000 loan with an APR of 14.9% over 84 months. How do lenders calculate this? Is there a formula used?

Thanks

Robert_Sterling_3

When you get a loan you will be told what rate of interest you are being charged i.e. AER
If there is an arrangement fee or compulsory insurance that goes with the loan then the cost of these is taken into account and gives an APR which will be higher than the AER.

Given an AER , size of loan, number of monthly payments we can calculate the monthly payments.

Given the APR we cannot do this.

The APR is used to compare two or more loans.

e.g. I offer you £10,000 at 8% for 5 years ... No strings.
The AER is 8% The APR is 8%.

I offer you £10,000 at 7% but I charge you £375.

The AER is 7% the APR is higher than 7% which loan should you choose.

You need to know the APRs.


Incidently when I was involved in lending I wrote a programme to calculate APRs. I realised that the APR on say a 10% interest loan decreased if you increased the term of the loan e.g. from 7 years to 10 years provided that you were charging a fee which we were.

We liked to keep the interest rates a bit low, not very, so that they could not be said to be extortionate.

As a result if a customer ask for a five year loan we might suggest a 7 year loan because the monthly payments would be lower ( More of them though )and the APR would be lower i.e. Not extortionate.

MarkyMarkD

??? I'm still confused about how the interest is calculated. Tried Google but couldn't see a website that would compare the calculation.

Any ideas? I'm looking to confirm the amount of interest that should be charged on a £3000 loan with an APR of 14.9% over 84 months. How do lenders calculate this? Is there a formula used?

Thanks

Ignoring the academic discursion above, this loan will cost £56.17 per month.

I can send you a spreadsheet to play with this if you pm me (and if you have Excel).

Robert_Sterling_3

This above answer is not correct.
The APR is calculated for comparison purposes.
You pay the AER on the loan.
You do not always get £3000 if there are charges.
Often these charges are day one charges
You might end up getting shall we say £2700 in your hand on day one.
The charges are subtracted from the loan and added to the interest for the purpose of calculating the APR.
Then it would need another little academic discursion to explain how, on the loan which was £3000
but notionally became £2700 on day one in my example, together with the fact that that the £300 not only disappears from the loan side but is also pops up on the Total Cost Of Credit Side, the APR is calculated.
You have used the APR as if it was the AER.
In some cases the APR will equal the AER.
The reason they have to print the APR in advertisements is because the AER does not tell the whole story. The APR is the "True Rate" for comparison purposes being charged and it takes account of any compulsory charges the borrower has to pay in addition to the interest on the loan Typically these might me an arrangement fee, a broker fee, an insurance fee but only if the insurance is optional etc etc

Summary: Without knowing what the charges are and when they are paid you cannot get from the APR to the monthly payment.
You actually pay the AER and we do not know what it is.

MarkyMarkD

Eh?

My answer is not wrong.

Irrespective of whether your actual loan of £3,000 puts £2,700 in your hand, or whether you have no charges deducted at all, an APR of 14.9% on that loan for £3,000 will cost you £56.17 per month.

"AER" is a term normally used re savings accounts, not loans. When you say "AER" I believe that you mean the headline rate on the product.

I didn't talk about HOW the APR is evaluated - I just used the correct APR formula in reverse to calculate the payments based on a particular value of advance and the APR.

So, enough academic discursion already!

Robert_Sterling_3

I will say this just once more then I will let it pass.
You do not actually pay the APR rate.
You pay the rate stated.



APR

RobertEdi

Thanks for all the input and advice. If I look at my existing loan there is no additional charges so I presume it's purely APR @ 14.9% over 84 months on a £3K loan, which I am paying at £57.49 pm. Total interest is £1,829.16

There's no mention of any addition charges on the credit agreement but I will ask if there have been charges that are not transparent.

I'm not even going to ask how the balance outstanding and early repayment charges are calculated if I wanted to pay it off early!

Kind Regards

Robert_Sterling_3

Where there are no additional Costs of Credit the APR does equal the loan Rate.