All You Need to Know About Annual percentage rate (APR)
Top tips for borrowing money? Don’t only look at the interest rate! If you want to compare the true costs of borrowing, you should always refer to the Annual percentage rate (APR) instead of the interest rate. Not sure what APR is? Read on to find out more about APR.
What is APR ?
Annual percentage rate (APR) is expressed as a percentage of the loan amount and it reflects the cost of borrowing over one year. It does not only take into consideration the interest rate but also all the extra charges that come along with the loan like late charges, administrative fees, etc. Therefore, you can easily compare which lender offers a better rate.
How to calculate APR?
A simplified APR formula is as follows: Interst Rate x 12 monthsx1.9 （fixed number）
In general, the lower the APR, the lower the borrowing costs are. For example, a personal loan with a 17.5% APR is cheaper than the one with a 20% APR.
Is Monthly Flat Rate or APR More Objective When It Comes to Taking Out a Loan?
| Item | Monthly Flat Rate | APR |
|---|---|---|
| Definition | Calculate the total interest expense for an unsecured loan | Calculate all costs for an unsecured loan, including interest rate and extra charges |
| Borrowing Cost | No,Cannot reflect all the costs of borrowing | Yes Reflects the cost of borrowing over one year |
Example: If you are going to take out a HK$60,000 loan with interest rate of 0.5% and a loan set up fee of 2% for 24 months, you will need to pay:
Situation 1: Considering Monthly Interest
Monthly Interest=HK$60,000 x 0.5% = HK$300
Total Interest for the entire tenor：24 x HK$300 = HK$7,200
Situation 2: Considering APR
The APR is 13.99% in this case, according to the method specified in the guidelines set out in the Code of Banking Practice.
Monthly Interest=HK$60,000 x 0.5% = HK$300
Total Interest for the entire tenor: 24 x HK$300 = HK$7,200
Loan Set Up Fee：HK$60,000 x 2% = HK$1,200
Therefore, you can only get HK$58,800 (less the loan set up fee) instead of HK$60,000.
In the 24-month payment term, you will repay HK$2,800 monthly (See formula: HK$60,000 + HK$7,200/ 24= HK$2,800).
If you only consider monthly interest, you will not have taken the loan set up fee into account when comparing the costs of borrowing.
Are loans with 0% APR the Best Loans?
In general, the lower the APR, the lower the borrowing cost. However, it is important to read the terms and conditions that come with the offer. A really low APR usually only lasts for a limited period of time or it only applies to selected customers.
Disadvantages of Comparing APR
Sometimes, APR cannot accurately reflect the total cost of borrowing because the calculations are based on long-term repayment tenor. The charges are spread too thin with APR calculations for loans with short tenor.
FAQ
What is an APR?
- Annual percentage rate (APR) reflects the cost of borrowing over a year, taking into account the interest rate and the additional charges that come along with the loan like late charges, administrative fees, etc.
What is the average APR of loans in Hong Kong?
- For bank loans, the APR is usually between 1.3%-3% and for loans provided by Money Lenders , the APR is usually 4-7%.