Financial Dictionary - APR
The APR for a bank loan means the Annual Percentage Rate, also known as the Annual Effective Rate. This is a widely used term in the financial world. It is defined using a formula with the following variables:
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- The nominal interest rate.
- The fees.
- The repayment period for the loan.
The APR is a percentage indicator applied to savings products, mortgage loans and personal or consumer loans.
The objective of the APR is to show - at all times and with the greatest transparency - the real price of a transaction with fixed interest rates during the period of the loan.
Since the Banco de España created the APR in 1990, it has been applied to all of the loans mentioned above to show the actual amount of money to be repaid to the financial institution following approval and acceptance of a loan. Only the Nominal Interest Rate (NIR) was applied before this.
Example APR for a bank loan
The Annual Percentage Rate is the amount you have to pay to the bank for lending you the money, including the extra costs.
Let's look at an example APR
Ana asks her bank for a 100,000 euro loan. As a competitive advantage, the bank offers a loan at an APR of 1.5%. The total cost of the loan for Ana is 101,500 euros, i.e. 1,500 euros is the APR she has to pay for the loan.
The difference between APR and NIR
Unlike the APR, the NIR excludes some important items for the customer, such as fees and the term or period of time of the loan. In other words, the NIR only represents the amount of money you have to pay to the bank as interest on the loan.
What type of products is the APR applied to?
The APR is used with three types of financial products: savings products, mortgage loans and personal or consumer loans.
- APR on savings products
This is applied to insurance and interest-bearing accounts. In these cases, the APR indicates the profit or return on the money deposited.
- APR on mortgage loans
As the repayment period for mortgage loans is longer than one year, the APR may fluctuate slightly with the final amount to be repaid by the customer. This is why houses are usually mortgaged to guarantee payment to the bank or financial institution. This means that the APR does not include certain extra expenses, such as property appraisals and taxes payable to public administrations, that we have to consider when requesting a mortgage loan.
- APR on personal loans
With personal and consumer loans, the APR reflects the real cost of repaying the loan to the bank or financial institution.