November 6, 2020

Consumer credit: APR calculation – calculator, formula, example

The APRC, or annual percentage rate of charge, is the most important indicator of the cost of a loan. It gives a percentage of the total amount owed by the client within one year and thus allows the loan to be assessed for profitability.

What is the formula for calculating the APRC on consumer credit and what does the term cover?

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In the case of bank and non-bank loans, it is difficult to compare individual offers on the basis of interest rates only. By signing the contract, the client undertakes to pay many other bank charges:

  • for concluding the contract
  • account maintenance
  • for credit management
  • for the first increased installment
  • for transfers of funds
  • etc.

When concluding a consumer loan it is very important to know the APRC, which includes both interest rates and other additional charges.

The formula for calculating the APRC

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The annual percentage rate of charge can be calculated using the following formula :

Where:

  • S is the total present value of cash flows
  • A k is the sum of all cash flows
  • t k is the time elapsed since granting the loan (expressed in years)
  • X is the annual percentage rate of charge

In this equation, we look for X (APR) such that S (total present value of cash flows) is zero.

How to calculate APR – example

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Calculating the above equation would be a lengthy process. Therefore it is better to use a calculator for calculating the APR, which will greatly facilitate the work. It is possible to find out the APR easily and quickly in a well-arranged APR calculator on the Good Finance’s website.

Here are some examples for calculating the APRC:

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The first two examples are ordinary bank loans, example number 3 is a non-bank microloan.

APR calculation – example 1:

  • Loan amount: 100 000 USD
  • Interest rate: 11%
  • Number of installments: 36
  • Loan fee: USD 1,000
  • Monthly payment: 3 274 USD

The annual percentage rate of charge, in this case, will be 12.4%.

APR calculation – example 2:

  • Loan amount: 150 000 USD
  • Interest rate: 9,9%
  • Number of installments: 60
  • Monthly payment: 3 180 USD

The annual percentage rate of charge, in this case, will be 10.4%.

APR calculation – example 3:

  • Loan amount: USD 9,000
  • Interest rate: 69%
  • Number of installments: 9
  • Monthly installment: USD 1,000

The annual percentage rate of charge, in this case, will be 97.4%.

Under the Consumer Credit Act, each lender is obliged to inform the APRC of the annual amount. This is the most important parameter that a loan applicant should follow when deciding between individual offers of banking or non-banking companies, as it indicates the actual price the client will pay for the loan as a result.