1. What is APR?

The Annual Percentage Rate (APR) is the true cost of borrowing, including both the interest rate and any additional fees charged by the lender. It provides a more comprehensive measure of loan cost than the interest rate alone.

2. How APR is Calculated

APR is calculated using an iterative method that solves for the internal rate of return:

Where:

• \( interest \) — Nominal interest rate (%)
• \( fees \) — Upfront loan fees ($)
• \( term \) — Loan duration in years
• \( amount \) — Principal loan amount ($)

Explanation: The calculation accounts for the time value of money, spreading the upfront fees over the life of the loan to determine the true annual cost.

3. Importance of APR

Details: APR allows borrowers to compare different loan offers on an equal basis. It's particularly important when loans have different fee structures or repayment terms.

4. Using the Calculator

Tips: Enter the nominal interest rate (%), any upfront fees ($), loan term in years, and the principal amount. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why is APR different from the interest rate?
A: APR includes both the interest rate and any fees, giving a more complete picture of the loan's cost.

Q2: What's a good APR for a home loan?
A: This varies by market conditions, but generally lower is better. Compare APRs from multiple lenders.

Q3: Does APR account for all loan costs?
A: APR includes most but not all costs. Items like appraisal fees or title insurance may not be included.

Q4: How does loan term affect APR?
A: Longer terms spread fees over more payments, which may lower the APR compared to the same fees on a shorter-term loan.

Q5: Why use an iterative method?
A: APR calculations require solving a complex equation that can't be solved algebraically, making iterative methods necessary.