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  #1  
Old 12-03-2004, 07:15 PM
Brendan Burgess Brendan Burgess is offline
 
Location: Dublin
Posts: 23,788
Default Key Post: A simple explanation of APR

APR is the true rate of interest on a loan.

If you borrow €100 and pay €12 interest at the end of the year, the APR is 12%.

Example
You borrow €100,000 from a bank.
The rate of interest is 3% calculated monthly.
3% is €3000
One month’s interest is €250 ( 3000/12)
At the end of January you will owe €100,250
In February, you will be charged interest on the €250 as well as on the €100,000.
So February’s interest is €250.625

At the end of the year, you will owe €3040 interest so the APR is 3.04%
If the interest is calculated daily instead of monthly, you will owe €3045 interest.

With interest rates at 3%, there is very little difference between flat rates and APR. And it doesn’t matter much if they charge it daily or monthly.

But a 10% flat rate charged monthly is 10.47% and 10.5% if charged daily.

Why do lenders with the same APRs have different cost per thousand?
The APR must also include any charges which the lender imposes, so there may be additional charges. Of course, one lender might be miscalculating the APR.

Another thing to watch out for is term of the loan. A 30 year loan at 3% will have a lower cost per thousand as a 20 year loan at 3%.

So should I focus on cost per thousand?
No. Consider both.

The cost per thousand will tell you what your repayments will be in hard cash every month. This will vary depending on the term of the loan. As the cost per thousand includes an element of capital repayment, it is not the true “cost”. The true cost is the interest element.

The APR will tell you the true cost and will allow you compare loans over different terms.
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  #2  
Old 12-03-2004, 07:56 PM
oysterman
 
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Default Re: A simple explanation of APR

Brendan,

Excellent post - thanks.

Given that APR represents the true cost of a loan, does the consumer benefit in any way from the flat rate being quoted?
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  #3  
Old 12-03-2004, 08:35 PM
Brendan Burgess Brendan Burgess is offline
 
Location: Dublin
Posts: 23,788
Default Re: A simple explanation of APR

No.

But the APR may be misleading in fixed rate loans. When considering a fixed rate loan, one should look at the fixed rate and the likelihood that the lender will be competitive when the fixed term expires.
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  #4  
Old 12-03-2004, 08:42 PM
 
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Default Re: A simple explanation of APR

On a related note - as far as I know Karl Jeacle's calculator works best when the nominal rate and not the APR is fed in:

www.jeacle.ie/mortgage/eu/

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  #5  
Old 12-03-2004, 08:48 PM
oysterman
 
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Default Re: A simple explanation of APR

The same caveat applies to flat rate in a fixed interest situation, of course.

Naturally the institutions will cling onto quoting flat rate, since it helps them disguise charges etc.

Is APR an EU-wide concept? Is it calculated on the same basis in different countries? If it is, it would seem a clear target for EU regulation....lenders only to be allowed quote one rate (APR) and it to be standardised across Europe. With, one hopes, increased access to financial products to consumers across European borders in the future, this is an obvious step to start the competition ball rolling.
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