Definition & Meaning:

You often see the term 'Annual Percentage Rate' (which is often shortened to 'APR') for loans. But what does it mean? Is it just a different way of saying the 'interest rate' you are charged for taking out a loan?

No it isn't just that. The 'Annual Percentage Rate' on a loan is a combination of both the annual/yearly interest that somebody pays on a loan, plus the additional fees/charges that a bank or lending institution charge a person for taking out a loan with them in the first place (e.g. administration fees, processing fees, service fees etc...).

As a result, the 'APR' is a better indication of how much you will actually pay back to the bank or lending institution for a loan on top of the original amount of money you borrowed ('the principal') than the interest rate is.

Example:

If you borrow $10,000 for 5 years, are charged a fixed interest rate of 6% each year, plus have to pay loan fees of $480, you'll end up paying a total of $13,480 for the loan. The 'APR' (the combination of the interest rate and loan fees) which you pay each year you are repaying the loan would be 6.96%.

Search to find another definition

   

Also Called:

APR.

Related Vocabulary:

Preferential Interest Rate, Redemption Penalties, The Principal, Fixed Interest Rate, Variable Interest Rate.

To learn more vocabulary connected to loans, you can do a free online exercise on bank loan vocabulary.