When you have to borrow money from a bank, APR is one of the most common terms that you will come across. It helps you determine the total cost of the loan that you have to repay. APR is the abbreviation for Annual Percentage Rate which indicates the total cost that you will repay annually to the bank or any financial institution. It is inclusive of some standard fees and the interest payable.
Let us assume you are borrowing $10,000 to buy a car and the loan tenure is 3 years. If the bank charges are at 5.5% APR, then you will be paying an interest and other fees of $848.60 along with the actual borrowed amount which is $10,000. So you will pay $ 301 every month for the next 36 months. The total amount you would have repaid at the end of the tenure is $10,848.60.
Initially, the repayments that you make every month will be towards the interest and not towards the loan amount, by the end of the loan tenure the EMI will be more for the loan amount and less for the interest.
What is 0% APR?
There are many financial institutions and lenders advertising 0% APR and you might be wondering what that means. It implies that you will not be charged any interest for the loan you borrow. Though the offer looks alluring, there is always something that is hidden in the fine print. The 0% APR may be for a short tenure and once you have borrowed money, the lending institution might charge more interest than the others and you could eventually repay more or about the same amount of money as other loans. Moreover, though you can save money from interest on APR, there are processing fees and other fees that you may have to pay. For example, if a credit card company offers a loan with 0% APR, you may have to pay an annual fee which is not part of the APR. You need to be extremely cautious when accepting such offers.
Difference between 0% APR and Deferred Interest
A deferred interest loan is also advertised as ‘no interest’ loans but there is a difference between this loan and 0% APR loans. Upon failure of payment of the entire loan amount that was borrowed during the promotional period, interest will be charged. Whereas in a zero percent loan, you will only pay the interest on the remaining amount even after the promotion ends.
What is Representative APR?
The rate of interest to be paid by a borrower is dependent on many factors like credit score, monthly income, etc. Lenders have to display a representative APR for borrowers to be able to compare the different products before making a loan application. A representative APR is the rate advertised that a small number of customers will pay. A minimum of 51% of the customers who are eligible for the loan has to get it at a representative APR. The rest may end up paying more than what is advertised.
It is essential for borrowers to compare products and do the due diligence when taking a loan and understand what amount they have to repay.