APR

APR is an abbreviation of Annual percentage rate. It describes the interest rate for the complete year rather than monthly interest rate. It is important for the lenders or credit card sellers to inform their customers about the annual percentage rate before signing any contract. It is useful for the lender to compare two loans and make decision accordingly. It is mainly introduced to reduce the confusion for the borrowers while borrowing money through loans. Credit care sellers and loan issuer might have complex and different plans. This cannot be easily understood by the borrowers, in order to reduce the confusion for the borrowers and make it a simple government in most countries has asked the loan issuer and credit card seller to find out the APR for the loan and then sell it to their customers. There are two types of APR they are,

• Nominal annual percentage rate where the interest rate is calculated using simple interest rate. It is calculated by multiplying the interest rate with the number of payments to be made within a year. In nominal annual percentage rate the fee is not considered. Nominal annual percentage rate does not reflect the true cost. Most of the credit card companies use this rate to make it attractive to the customers. It is duty of the customer to identify the flaw in this method and make correct decision on the purchase of credit cards.
• Effective annual percentage rate is the one in which the fee is included along with the compounded interest rate.  The fee include participation fees, loan origination fees, monthly charges, late fees etc. It is called as true interest rate because it clearly shows the actual interest rate. In calculation of the effective annual percentage rate the upfront payment is considered, which was not considered in the case of nominal annual percentage rate.

Problem in APR are,

• There may be some hidden cost which cannot be included in APR.
• APR alone cannot be used to evaluate the loan structure.
• APR alone cannot be used to compare two or more loans.
• The loan period must be know precisely to make good judgment using this method, however in most of the case payment of loan depends upon the availability of the funds.