What is an Annual Percentage Rate?

Annual percentage rate (APR) is a method of interest calculation stipulated by the US credit fair law.

Annual percentage rate

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Annual percentage rate (APR) is a method of interest calculation stipulated by the US credit fair law.

Its characteristics are as follows: the shortest time interval between two payments is used as the compound interest period to determine the yield at maturity of the period; then the yield at maturity of the period is multiplied by the number of compound interest periods in a year. The purpose of this regulation is to establish a standard procedure and method that can be understood by all people between different interest calculation methods. Although there will be some complexity when payments are made in irregular periods, the use of APR simplifies the issue of comparing different loan periods.

Because of the above regulations, any financial institution in the United States must convert the interest rate involved into APR when providing financial services, and clearly inform customers. It should be noted that when reporting APR, the compounding frequency must be specified. The ratio is 12% of APR. If the compounding frequency is monthly, the actual monthly interest rate is 12% / 12 = 1%. If the compounding is quarterly, Then the seasonal real interest rate is 12% / 4 = 3%, but the monthly real interest rate is not 1%, but (1 + 3%) ^ (1/3) -1 = 0.9901%. The monthly effective interest rate is (1 + 1%) ^ (12) -1 = 12.6825%, and the quarterly compound interest rate is (1 + 3%) ^ (4) -1 = 12.5508%. (Where ^ represents the power.) ^[1]

The annual percentage interest rate (APR) refers to the simple interest earned after one year, that is, the amount of interest without considering the compound interest effect. The annual percentage rate (APR) is usually less than the effective annual rate (EAR).