annual percentage rate

Annual Percentage Rate for a Personal Loan: What Does it Mean?

An annual percentage rate or APR is a commonly used term in the finance world. It is especially pertinent to borrowers. Surprisingly, most borrowers aren’t aware of it. Interest rates are widely used by borrowers while calculating the total cost of a loan. However, APR presents a more holistic alternative to loan costs. 
If you’re considering availing of a Personal Loan, you should try to estimate the Personal Loan percentage (or the APR) of your loan before signing on the dotted line. This will paint a clearer picture of the Personal Loan and assist you in making an informed decision. 
In this article, we’ll cover everything you need to know about APR for Personal Loans. 

What is the Annual Percentage Rate?

An annual percentage rate is a total cost associated with availing of a loan from a lending institution or a bank. In contrast to the interest rate, the APR is an annualized percentage that covers the interest rate, processing fee, pre-payment charges, penalties, and any other costs associated with the loan. 
Typically, APR is almost always higher than the interest rate. The reason for this is because APR includes interest rates as well as other costs associated with availing of a loan.  
The APR, as the name suggests, is an annualized percentage. This means that the cost denoted by the APR implies yearly charges. Thus, if a Personal Loan has been availed for a tenure of more than one year, then you need to include the number of years of the loan to calculate the total cost of the loan for its entirety. 

What are the Benefits of APR Compared to Interest Rate?

The APR is a more comprehensive way of estimating the total costs of your loan in comparison to interest rates. Given below are a few benefits of APR for prospective borrowers: 

Takes All Costs into Account

As mentioned earlier, the Personal Loan percentage or APR is a figure that takes into account all costs associated with a loan. This includes the interest rate, any penalties, any waivers, any pre-payment charges, any processing fees, or any other cost. Hence, it is a more accurate way of judging the cost-effectiveness of a loan compared to the interest rate.  
The APR is an annualized figure similar to the interest rate. This means that you can calculate your yearly cost through the APR. Since financial accounting is usually done every year, it is easier to use the APR which is already annualized. If you want to know the total cost across the entire tenure of the loan, you can calculate it based on the APR as well. 

Easier to Compare Costs  

Using the APR is a better way to compare the charges levied by lenders. Every lender has a different cost structure. Even if interest rates charged by lenders are similar, costs like processing fees, pre-payment charges, etc. may be widely divergent. 
This can impact the overall borrowing cost significantly. Thus, when comparing the products of various lenders, you should compare the APR and not just the interest rate. Before availing of a loan from a lender, borrowers should request for the APR in addition to the interest rate, so that they get a clearer picture and can take a more informed decision.  

Also Read: How to Avail Personal Loans at Lowest Interest Rate?

How to Lower APR for a Personal Loan?

It is possible to reduce the APR associated with a Personal Loan. Here are some of the steps that you can take before applying for a Personal Loan: 

Improve Credit Score

Your credit score is a measure of your creditworthiness. The higher your credit score, the more trust lenders have while lending to you. Since lenders trust you more and feel more confident that they will receive their money back, they will offer you a loan with a lower interest rate. 
Your credit score is calculated and distributed by CIBIL in India. Any number on or above 750 is considered to be a good credit score. There are several ways in which you can improve your credit score or CIBIL score including repaying all your loans on time, never missing a payment, etc.
You can create a credit history by using your credit card or taking out small loans. Remember that you need to always pay your dues before the due date to keep maintaining a good credit score. Any missed payment can negatively impact your score and harm your borrowing prospects in the future. 

Avail Loans from Non-Banking Lenders

A lot of borrowers assume that banks are their only option for availing of a loan. However, can’t be further from the truth.  In India, there are a lot of lending companies known as Non-Banking Financial Companies or NBFCs. These companies usually provide loans at a lower APR as compared to banks. 
Rather than going straight to a bank to apply for a loan, you can consider applying to reputed NBFCs that have a strong track record and a long history of lending. If you find a loan product that suits your needs, compare the APR with that of a bank and select the more economical option.
As a rule of thumb, it is a good idea to compare the APR of various lenders before taking a final decision. Remember to compare the APR and not just the interest rate. 

Secure the Loan

A secured loan is less risky and thus costs less than an unsecured loan. A secured loan is a loan in which you provide the lender with collateral such as property or jewelry. Secured loans are less costly because lenders are a lot more confident about getting back their funds by diluting the secured assets in case the borrower is unable to service the loan. 
If you want to lower the APR of your Loan, try to talk to your lender and convince them to reduce your APR by securing your loan against collateral. 

To Sum Up

The annual percentage rate is a better way to determine the cost of your Personal Loan rather than the interest rate. You can calculate the APR by using APR calculating tools that are available online. The Personal Loan percentage will be lower if you can demonstrate to your lender that you are credible and can service the loan. 

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