The APR (Annual Percentage Rate) is a mathematical formula used to calculate the cost of a transaction over an annual period. This formula includes variables such as the nominal interest rate (NIR), fees and the term or frequency of payments. This gives us an idea of the cost of the loan.
To put it another way, the APR indicates the actual amount we will pay for the loan. It is expressed as a percentage. So, if you apply for a €200,000 mortgage and the APR is 2%, the total to be returned to the bank is 204,000 euros.
The APR is very useful for understanding what financial products are really offering and to be able to compare them. It is particularly useful for mortgages, enabling customers to compare offers from various entities.
Which financial products have an APR?
We find APRs in three types of financial products:
As the repayment period is more than one year, the APR may vary the amount to be repaid by the customer slightly. A mortgage is usually arranged with the property as the guarantee of payment, so it does not include some extra costs, such as appraisal and taxes.
The APR indicates the actual cost of repaying a consumer loan or personal loan.
For some products, such as accounts and insurance, the APR indicates the returns generated by the money we deposit.
What does the APR not include?
With mortgages, costs paid to third parties - such as notary and analysis fees - are not included in the APR. Items relating to insurance and guarantees are also not included.
Other aspects that should be taken into account include:
- The APR reflects the annual interest rate. However, the nominal interest rate may refer to monthly or six-monthly periods.
- There is no point in comparing the APRs of fixed and variable-rate loans. With variable-rate loans, we cannot know how the interest rate will change over time.
- Comparing the APRs of loans only makes sense over the same time period.
When comparing offers, the APR gives us an idea of which is the best for us. But if it is a variable-rate loan we do not know how the APR will change over time. This is why we talk about variable APRs and say that they are only for information.