# Annual Percentage Rate

## What is meant by annual percentage rate?

Annual percentage rate (APR) refers to the interest rate paid by a borrower each year on a loan, credit card or other types of credit. It is represented as the percentage of the total balance that is to be paid by the borrower.

Different borrowing instruments may come with different interest rates. However, APR can be used to compare different types of borrowing options. The loan or credit card offering with the lowest APR can be deemed as the least expensive option. Simply put, APR is the annualized representation of the interest rate borne by the borrower.

APR denotes the real cost of the loans over the period of one year that must be paid back to the lender. Borrowers must have knowledge about APR before filing for any kind of loan.

## How is APR different from nominal interest rate?

Nominal interest rate is charged in every given loan, and it strictly represents the amount of interest to be paid and no other costs. A loan may come with other additional costs like processing fees, pre-closure charges, etc. which are not factored into the nominal interest rate.

However, APR factors in all these costs and provides an overall cost summary associated with taking a loan. The APR is usually higher than the nominal interest rate as it already includes the nominal interest rate and additional costs over it.

The rate quoted by banks and credit card companies is only the nominal interest rate as it does not factor in other costs. However, APR is designed to give borrowers a clearer vision about the loan or debt they are going to enter.

## How does APR work?

APR is expressed as a percentage and calculated as the percentage of the principal that is paid each year, including all costs. APR does not include the compounding of interest within the year. Credit card companies may present the interest rate as a monthly charge; however, they are mandated to provide the APR to customers to maintain transparency.

For credit cards, there may be a no interest facility available to the borrower. If the borrower can repay the entire card amount within the period of one month, known as the grace period, then he/she may not be charged any interest by the credit card issuer.

However, if the balance is carried over on the card, then APR may be charged.

## How is the APR calculated?

APR is simply calculated by taking the periodic interest rate and dividing it by the number of periods for which the interest is applied. In this, the nominal interest rate is not taken as a percentage but rather as the total interest amount paid throughout the course of the loan.

Here, the interest refers to the total interest amount accumulated over the course of the loan and not the interest rate. Principal is the total amount taken as loan, and n is the number of days under the term.

Usually, banks may provide the borrower with the APR option while applying for the loan. There are also APR calculators available on the internet that would ask the borrower to enter the interest rate, loan amount, ROI, and processing fees. With just a click of a button, the APR can then be calculated.

## How is APR decided by the banks?

The APR may differ depending on the bank as it changes with the amount of interest rate charged by each bank. Banks might decide what APR to charge based on the profile of the borrower. This includes the borrower’s debit and credit history, details of previous transactions, income sources, etc.

Banks calculate the APR after applying the standard interest rate. The final APR is calculated on the total amount offered to the borrower.

## Why is APR important?

Lenders may often keep interest rates lower while racking up other fees and charges. This is done to attract more customers and give the image of the loan being less expensive than it actually is. The annual interest rate shown by the banks is often less than the actual costs accrued to the customers.

APR comes in handy while calculating mortgage loans or loans against property. This is because such loans often include various hidden costs in the process of verification and appraisal of the loan. Higher processing fees and administration costs add to the interest rates offered on such loans.

Thus, the APR is helpful in finding out which lender is suitable for the borrower.

## What are the types of APR?

Credit cards may have multiple APRs charged on them. These include the following:

• Purchase: This rate applies to online purchases, and online merchants or bill payments.
• Introductory: These might be relatively lower rates that are offered in the beginning. However, these rates have an expiry date and the final rate charged to the borrower is higher.
• Balance transfer: This is the rate paid on the debt that is moved over to the credit card. This rate may start with a lower level and may be a balance transfer fee.
• Cash advance: Rates may be relatively high under this category as this is the rate charged for getting cash from an ATM.
• Penalty: This rate is charged in case of late payments. It may rise; however, this increase can be curbed by making consistent on-time payments.

## How APR is Different from Annual Interest Rate & Effective Annual Interest Rate?

Both the annual interest rate and effective annual interest rate are slightly different from the annual percentage rate. Annual interest rate is the basic interest rate charged while lending out a loan. It is paid without considering the compounding of the interest or any fees.

While effective annual interest rate is a percentage value which includes the compounding value of interest over the life of the loan. It provides a better idea of the interest that would be paid monthly.

Calculating the cost of a product or an enterprise based on the direct and the indirect costs (overheads) involved. Multiple methods of absorption costing include Direct labour cost percentage rate, Direct material cost percentage rate, Labour hour rate , Prime cost percentage rate and Machine hour rate.

An earnings announcement is a public statement of a company’s earnings, usually done on a periodic basis. These official announcements are released quarterly or yearly to inform the investors and the market about a company’s financial performance. Companies announce their financial reports through press releases on their websites and list them on the stock exchanges website. After the information is released through a conference call, there is a question-and-answer round with the senior management in which analysts, media, and investors can participate. On the basis of the report, analysts then incorporate earning measures such as EPS (Earning Per Share). These reports help investors in making sound investment decisions. Earnings results are announced during the earnings season on a date chosen by the company. Stock prices of the companies take a swing before and after the company releases its earnings report. Equity analysts also predict earnings estimates through their analysis which drives stock prices movement due to speculations. Stock prices even move after the earning results are declared, up or down, depending on how the results have turned out. Source: Copyright © 2021 Kalkine Media Pty Ltd. When are earning announcements made? It is mandatory for every listed company to report its quarterly financial results in the US but not in Australia. In Australia, companies release their financial report on a semi-annual basis. Having said that, many Australian companies also update their shareholders quarterly, but these are not considered official earnings. These quarterly reports are released to satisfy the market demand for information and to disclose the company’s guidance on its performance. The financial calendar varies from country to country and therefore, the earnings season changes as well. In the US, the earnings season starts after the final month of the financial quarter. Usually, American companies start posting their earnings reports in January, April, July, and October. In Australia, companies report twice a year, usually around February and August, or May and October. It depends upon the company’s financial cycle. However, whether quarterly in the US or semi-annually in Australia, these earnings results are required as agreed while listing the company with the stock exchanges. Source: Copyright © 2021 Kalkine Media Pty Ltd. Why are earnings announcements necessary? Financial results help investors, media, and other stakeholders of the company to have a greater understanding of the company’s financial footing. Companies not just provide sales, operating profit, net profits, but also offer guidance and outlook for coming months. Additionally, these reports also have senior management statements directed at the market. Therefore, earning announcements act as an informative document for the investors and analysts to study and gauge a company’s performance. Analysts can provide earnings estimates, and investors can then take wise investment decisions. These documents are also vital for companies when it comes to seeking funding for the business. Financial institutions can also judge a company’s financial health by evaluating earnings reports. The management offers insights on growth drivers, risk factors, etc that impacted the earnings during that particular period. Analysts also assess the earnings results, taking into account the external factors that drove the growth or impacted the firm negatively. These factors could be mergers and acquisitions, bankruptcies, economic discrepancies, policy changes, etc. For investors, earnings reports are essential because these announcements swing the price up or down. Traders keep a keen eye on these reports as it can be a time when they can confirm positions. However, some investors also avoid earnings seasons because of the involvement of various human factors.

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