1. What is APR?

APR (Annual Percentage Rate) represents the true cost of borrowing, including both interest and fees, expressed as a yearly percentage. It allows consumers to compare different credit offers on a standardized basis.

2. How Does the Calculator Work?

The calculator uses the APR formula:

Where:

• \( I \) — Total interest paid (currency unit)
• \( F \) — Fees (currency unit)
• \( P \) — Principal amount (currency unit)
• \( T \) — Loan term (years)

Explanation: The equation combines all borrowing costs (interest + fees) relative to the principal amount, then annualizes the rate based on the loan term.

3. Importance of APR Calculation

Details: APR provides a standardized way to compare loan offers, as it accounts for both interest rates and fees. It's particularly important for credit cards and other revolving credit where fees may significantly impact the true cost of borrowing.

4. Using the Calculator

Tips: Enter all amounts in the same currency units. The principal and term must be greater than zero. For credit cards, use your average daily balance as the principal and calculate interest/fees over a billing cycle.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and interest rate?
A: Interest rate only reflects the cost of borrowing the principal, while APR includes both interest and fees, giving a more complete picture of borrowing costs.

Q2: What is a good APR for credit cards?
A: As of 2023, average credit card APRs range from 15-25%. Rates below 15% are considered good, while rates above 25% are high.

Q3: How does loan term affect APR?
A: Shorter loan terms typically result in higher APRs because fees are spread over a shorter period, while longer terms may have lower APRs but higher total costs.

Q4: Are there limitations to APR calculations?
A: APR doesn't account for compound interest frequency or changes in rates over time. For adjustable-rate loans, the APR is only an estimate.

Q5: Why is APR important for credit cards?
A: Credit cards often have various fees (annual, balance transfer, cash advance) that significantly impact the true cost of borrowing, making APR a crucial comparison metric.