Applying for a loan will come with lots of new acronyms and terms that you’ll likely be unfamiliar with. One of these will be your annual percentage rate or APR.

What is an APR?

Your APR will be the amount you pay your lender annually. In essence, it’s the price of your loan. It’s represented as a percentage that includes additional costs or fees but not compounding interest.

Overall, an APR will give you a better idea of what your loan will cost you than anything else, including interest rates. This is mostly because it includes other fees like we mentioned above.

Compound or Simple Interest

The amount you are charged for your loan will depend entirely on whether your lender uses compound or simple interest. Simple interest is paid in full when you make your monthly payments in full and on time. You can lower your interest rates with a simple interest by paying your bills in full in advance.

Compound interest is calculated based on existing interest and newly charged interest. Basically, that means you’re paying interest on your interest. A lot of credit card companies charge on compound interest, which means you’ll likely end up paying more in your overall APR.

Calculating APR

It’s not very hard to calculate APR. You add your fees to the interest paid over the life of the loan. Then you divide that number by the loan amount. After you’ve calculated that, take the new number (fees+interest paid over life divided by loan amount) and divide it again. This time by the number of days in the loan term.

Multiply the number you get from that calculation by 365. Then multiply once more by 100. That will give you your APR.

For more information on calculating APR, or the loan options that might be available, go to Liftcredit.com. Review the site for more financial terminology and to get in touch with financial and loan experts.