What does "APR" mean?

APR - that's what it means

What use is a low interest rate on a loan if the bank charges you hefty closing and account fees or gives you an interest rate for months?

• In order to make the actual costs of a loan clear to you as a customer, it is not enough for a financial institution to simply state the so-called specify the nominal interest rate, but also the effective annual interest rate.
• The nominal interest rate (more precisely: nominal interest rate) indicates the interest rate you have to pay for your loan per year, sometimes for a shorter period of time. This can be surprisingly low for some banks.
• In most cases, however, there are also fees in a wide variety of forms.
• Often the specified interest rate does not apply for a whole year, but as a rate to be paid monthly. An interest rate of 0.5% per month (!) means that your loan will quickly become more expensive, even if the value initially appears low.
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Borrowing rate and annual percentage rate - an explanation

Debit interest and annual percentage rate of credit are important for banks and credit customers. Also …

• However, in order to be able to compare the loans (or investments) of individual institutes, they must inform you of an effective annual interest rate, which in principle covers the entire costs (or the total interest on a credit balance).

Calculating the annual percentage rate - an example

Financial institutions calculate the annual percentage rate using a (mandatory!) standardized procedure, the complexity of which will not be explained here. To give you an overview of what the annual percentage rate means, a simple loan should be calculated as an example:

1. The loan amounts to 1000 euros, the nominal interest rate is 0.5% per month and a one-off processing fee of 30 euros is due. To put it simply, assume that the borrower repays the loan (including interest and fees) at the end of a year.
2. The sum to be paid at the end of the year is 1000 euros (the loan) + 60 euros (the interest for one year, namely 5 euros per month) + 30 euros (the fee) = 1090 euros.
3. The effective annual interest in this simplified example is 9% (90 euros of 1000 euros loan amount). That's amazing!
4. Of course, the calculation becomes more complicated if you agree on monthly repayment installments. The decisive factor here is whether the interest rate of 0.5% per month refers to the original loan amount or to the remainder, which is becoming smaller and smaller. It is also important whether the processing fee is paid with the first installments.