Definition
The Annual Percentage Rate (APR) is the yearly cost of borrowing money expressed as a percentage, including interest and any additional fees or charges associated with the loan. Unlike the nominal interest rate, APR provides a more complete picture of the true cost of borrowing by factoring in origination fees, closing costs, and other charges.
Formula
Where Interest is the total interest paid, Fees are any additional loan costs, Principal is the loan amount, and n is the number of days in the loan term.
Example
Credit Card APR Example
If you have a credit card with a 20% APR and carry a $1,000 balance for a year, you would pay approximately $200 in interest. For a mortgage with a 4% interest rate but $5,000 in closing costs on a $200,000 loan, the APR might be 4.25% to account for those additional costs.
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