The annual percentage rate (APR) is a key factor in understanding the true cost of borrowing when it comes to loans, including small business loans. It provides a comprehensive picture of the loan's interest and fees, allowing borrowers to make informed decisions. At Lendio, we're here to simplify this important concept and ensure our customers have all the information they need to succeed.
Why is the APR important for borrowers?
The APR is essential for borrowers because it provides a clear and complete view of the cost of borrowing money. By considering the APR, borrowers can:
Compare loan offers more accurately.
Understand the real cost of their loans.
Make informed decisions about the most cost-effective financing option.
What components make up the APR?
The APR typically includes the following components:
Interest rate: The annual interest rate charged on the loan.
Origination fees: Fees charged by the lender to process the loan application.
Closing costs: Expenses associated with closing the loan.
Other fees: Additional costs such as service fees or annual fees.
It's important to note that the specific components included in the APR can vary depending on the lender and the type of loan.
How is the APR calculated?
The APR is calculated by considering all the costs associated with the loan and expressing them as an annual interest rate. The formula for APR calculation takes into account the loan amount, the interest rate, and the duration of the loan, along with any fees or additional costs. Lenders are required by law to disclose the APR to borrowers.
Is the APR the same as the interest rate?
No, the APR is not the same as the interest rate. While the interest rate represents the cost of borrowing the principal amount, the APR includes all associated costs, such as fees. The APR provides a more comprehensive view of the total cost of the loan.