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Why You Need To Calculate APR Rates Before Signing A Loan Agreement

Most clients visiting credit counselors seek to understand the explanation of APR, that is, annual percentage rate which is the amount the lender charges on loans and credit cards. Most of the clients find themselves in a debt situation when they acquire cars on loan or mortgage, but most of them fail to understand how the amount arrived at as interest charges were calculated. For individuals using credit cards from different lending institutions, they can also calculate APR that their cards attract monthly to cover minimum charges and interest that the credit card attracts monthly. Other factors that influence the amount that one pays in a particular month is whether one has been paying the minimum amount or they have been paying additional payments in an attempt to clear their balances. Figures arrived at using the APR does not imply one’s monthly bill for a specific month but the interest that one pays while each credit card has specific charges depending on the lending institution. In most countries the lenders are required to disclose their lending rates in standard form to avoid customer over exploitation by the lending institutions.

When calculating APR one multiplies the number of payments annually with the payment period. Using an example of 9.5 percent APR it is divided by 12 which gives 0.79 percent monthly interest rate on one’s outstanding balance. If one took a loan of 10000, using the set rate of 9.5 percent they are required to pay 79 per month. For loans acquired on compounding rates basis, balances from the previous months also add to the outstanding balance. One needs to verify the rates when they are seeking for a loan but there are other factors that need to be considered such as mode of repaying the loan and the length of the loan agreement. One also needs to verify the additional fees associated with the loan such as payment protection insurance as they also have an effect on the compound interest. Lending institutions are required to present the facts and figures to their clients before they sign the loan agreement to allow them to make informed decisions. One also needs to determine whether the APR is fixed or variable where with variable they pay amounts of money in increasing or decreasing order while for fixed rates the amount remains constant.

Investors also use compounding interest in relevant investment decisions.A Brief History of Funds

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