How Is Annual Percentage Rate (APR) Different From Simple Interest Rate?
The Annual Percentage Rate takes in to account the overall extra costs that go in to processing a loan and is different from the simple interest rate that takes in to account only the face amount of the loan. It does not affect the monthly payments that one has to make but gives a correct and accurate picture of how much a loan would cost in actual terms taking in to consideration hidden costs like points, mortgage insurance, and loan application fee among others. A rough guide to calculating APR would be subtracting the simple interest that one would accrue at the end of the term and then dividing the interest amount by the subtracted amount. For example if one borrows $1000 at 10% simple interest rate for 1 year then the simple interest accrued would be Simple Interest = 1000 * 0.1 * 1 = 100 The amount of simple interest subtracted from the principal amount would give us $900. The annual percentage rate in this case can be calculated as APR = 100 / 900 = 0.111 = 11.1% Thus it can be
