APR Calculator

What is an APR Calculator?

An APR calculator is a tool that helps you figure out the Annual Percentage Rate for taking a loan. It is useful when you are trying to get a grip on how much you will be paying back, considering the loan origination charges. 

It denotes the actual cost of borrowing, including interest and other fees, expressed as an annual percentage. An  APR calculator helps borrowers compare different loan offers and understand their total repayment costs. 

How Can APR Calculator Help You?

An APR calculator can assist you in numerous ways by offering a comprehensive understanding of the actual cost linked with the borrowing. Below are some of the key points that explain the benefits of an APR Calculator; 

1. Compare Loan Offers Efficiently

• Different lenders may offer varying interest rates and fees, which can affect the overall cost of borrowing. It is essential to compare offers from multiple financial institutions before taking a loan. 
• The calculator simplifies the process of comparing different loan options as it provides the actual cost of borrowing precisely. 

2. Avoid Hidden Costs

• Additional fees such as origination fees, closing costs and others which might not be apparent when we first see the loan terms as these costs are not factored in the rate of interest at which the loan is given.
• APR includes all these costs, so you get a more realistic idea of what you will have to pay. 

3. Budget Smarter

• It helps you to analyze your financial condition and decide if you can afford a loan by calculating the monthly payments. 
• Assists in effective financial planning by accurately estimating the total interest and repayment expenses. 

4. Choose the Right Loan Term: 

• Generally, when you choose a shorter loan term, you will end up with a lower annual percentage rate. 
• However, it is important to keep in mind that shorter loan terms also mean that you will have higher monthly payments. 
• So, you will have to consider what works best for your budget and financial situation before making a decision.

How Does an APR Calculator Work?

An APR calculator works by calculating the Annual Percentage Rate by considering the loan amount, loan origination charges, loan duration, rate of interest, and any linked fees. 

Below is a step-by-step guide on how an APR Calculator works;

1. Enter the Loan Details: You input the following information into the calculator

• The total loan amount borrowed.
• Any additional costs, such as origination fees or closing costs.  
• The repayment period in months or years 
• The rate of interest 

2. Calculate the Monthly Payments: The calculator figures out your EMI based on the input values.

3. Include Fees in APR Calculation: Subtract the loan origination charges from the total loan amount availed to get the actual amount received. The calculator uses the IRR function to calculate the internal rate of return (IRR) or mAPR (monthly APR). The calculator annualizes this monthly value by multiplying it by 12 to get the annual APR.

4. Displays Results: The calculator then provides the APR  percentage as output.

Formula to Calculate APR

The calculator’s objective is to find the Annual Percentage Rate or APR, which represents the effective cost of taking a loan, considering all the hidden costs and charges. APR is the rate that makes the net present value (NPV) of all EMIs equal to the effective loan amount, i.e. loan amount minus hidden costs. 

Effective loan amount = ∑ [ EMI / {(1+mAPR) ^ n] 

Where, 

Effective loan amount = Loan Amount – Loan Origination charges 

EMI = Equated Monthly Installments

mAPR = Monthly Annual Percentage Rate

APR (annualized) = mAPR * 12

Example of APR Calculation

Suppose, you take ₹10,00,000 loan at a 12%  interest rate for 3 years with ₹15,000 as loan origination fees. Then the APR calculation will be as follows; 

Step 1: Calculate the EMI

EMI = [P * r * (1 + r) ^ n] / [(1 + r) ^ n – 1]

Where:

• EMI: Equated Monthly Installment
• P: Principal Amount of Loan (₹10,00,000 for the above case)
• r: Rate of Interest in monthly format at which the loan is taken (1% in the above example.
• n: Tenure of loan in months (3*12 = 36 months for the above case)
  

For the above example, 

EMI = (10,00,000 * 1% * (1+1%)^(36)) / (1+1%)^(36) – 1 

EMI = ₹33,214.31

Step 2: Subtract fees from the loan amount to get the effective loan amount

Effective loan amount = Loan Amount – Loan Origination charges 

Effective loan amount = 10,00,000 – 15,000 = ₹9,85,000

Step 3: Use the IRR formula to calculate the monthly APR

Effective loan amount = ∑ [ EMI / {(1+mAPR) ^ n] 

9,85,000 = (33214 / ((1+mAPR)^1) + (33214 / ((1+mAPR)^2) + …………………… + (33214 / ((1+mAPR)^35) + (33214 / ((1+mAPR)^36) 

We get the value of APR as 1.09%. Annualize APR = 1.09% * 12 = 13.05%

How to Use Pocketful APR Calculator?

Below is the complete break-down of how to use Pocketful’s APR Calculator; 

1. Enter the Loan Amount: Input the total amount you wish to borrow. For example; INR 50,000

2. Add Additional Charges: Enter any additional fees charged by the lender, such as processing or origination fees. Example: INR 1,250 is entered as the loan origination charge. 

3. Set the Loan Tenure: Choose the loan term in months using the slider in the input field. Example: 24 months

4. Adjust the Interest Rate: Set the annual interest rate using the slider or input field. Example: 9% 

5. See the APR Calculation:The calculator instantly displays the APR. As per the details mentioned above, the APR will be 11.53%. 

With the help of Pocketful’s APR Calculator, you can efficiently manage your money and avoid any unexpected expenses.