Everything you ever wanted to know about the APR and how it’s calculated

All loans, whatever form they take, must set out their APR or annual percentage rate. This makes it clear how much a loan will ultimately cost you, and comparing the APRs of different loans helps you make better borrowing choices.

What is the APR?

The APR indicates how much a loan will cost you over a one-year period. It’s given as a percentage: the lower the %, the more affordable the loan. The APR helps clarify how loans that seem similar at first glance actually differ from one another, helping you as the applicant make smarter borrowing decisions. The exceptions here are loans that have a term of less than one year and that come with a contract fee. The APR on loans taken out for shorter periods are still calculated on the basis of a full year, in which case the % can be very high. The rule of thumb is that the shorter the loan period and the bigger the contract fee, the higher the APR.

As such, the APR is of use in working out the total cost of borrowing with loans taken out for longer than one year. It’s also important that the terms and amounts of the loans being compared are the same.

Calculating the APR

The APR is calculated according to a formula used throughout the European Union. This formula takes into account all of the unavoidable costs involved in issuing a loan:

• Interest rate
• Contract fee
• Monthly fees
• Admin fees
• Fee for issuing loan
• Other potential costs

For a more detailed explanation, take a look at the ‘Procedure for the Calculation of the APR on Consumer Credit’ in the State Gazette.

The APR doesn’t include any penalties or additional fees that may be incurred due to the borrower missing payments.

The APR helps you understand how much a loan will actually cost you

If you want to take out a loan, then in order to make the best choice you first need to compare the APRs indicated on lenders’ websites and see which ones are the most affordable. Once you’ve narrowed your choice down to, say, two loans, ask for offers on both and go for whichever one is cheaper.

The higher the APR on a loan, the more it will cost you per year. Just make sure the term and amount of the loan you’re asking about are the same, otherwise the offers you get won’t be comparable.

In choosing a loan you not only need to take the interest rate into account, but also other costs like the contract fee and monthly admin fees. Remember that a favourable interest rate alone is no guarantee that the loan won’t end up costing you more overall.

Examples of how the APR is calculated

Loan 1
Amount: €3000
Term: 3 years
Interest rate: 12.9% of loan balance
Contract fee: 2% of loan amount (€60)
Monthly admin fee: €1.50
APR: 16.49%

Loan 2
Amount: €3000
Term: 3 years
Interest rate: 8.8% of loan balance
Contract fee: 2% of loan amount (€60)
Monthly admin fee: €8.80
APR: 18.9%

The shorter the term of the loan, the greater the impact one-off fees (like the contract fee) will have on the APR. That’s why with home loans, for example, the contract fee has much less of an impact on the APR.

For example, if you take out a home loan worth €135,000 with an interest rate of 1.8% per annum, a contract fee of €250 and a KredEx guarantee fee of €225, the APR is just 1.87%.

Summary

Since the APR is given as a %, it helps you understand straight away how much you’re likely to have to pay in total and makes it easier to compare offers, whatever form of credit you’re applying for – be it a credit card, a home loan, a small loan, leasingor something else.

In Coop Pank you can fill in loan and leasing application forms online. Once we’ve received your application, we’ll make you a personal offer. Ask one of our loan administrators for more information.