In this article we will discuss the annual percentage rate or APR of a personal loan . Borrowing money also costs money.
That is clear to most of us. In order to clearly indicate to the consumer what a loan actually costs, use is made of the term annual percentage rate or APR of a loan.
Those who apply for a loan want to have the opportunity to compare different providers. Just like all loan types, costs and fees are also linked to the personal loan. These costs consist first of an interest that must be paid on the borrowed money. In addition, banks and lenders can count a number of extra costs such as file costs. Borrowing money can therefore become unclear. In order to be able to compare properly, the JKP of a personal loan was therefore created.
- The total cost of a personal loan therefore consists of 2 elements. There is first and foremost the nominal interest rate. Suppose you decide to borrow 5000 euros. The interest rate of the loan is 5%. This is not yet the APR of a personal loan, but the nominal interest rate.
- As a consumer you could therefore reason at first sight: If I pay 5% interest on my credit, I have to pay 5000 x 5% = 250 euro interest after one year.
- However, this is often not true. With many personal loans, the contract states that the interest is not calculated per year, but over a shorter period.
- From the first month after deriving, interest is charged, namely 1/12 of 5%. Every month the outstanding debt increases a little because there is also an interest on the interest.
- After a year, therefore, more than 250 euros interest will be owed on the outstanding loan.
- There is already some financial mathematics around the corner. We like to refer the lovers of formulas and numbers to this Wikipedia page .
- In any case, it is clear that it is not easy for the average credit applicant to calculate this yourself.
APR of a personal loan and costs
- The bank or lender may charge additional costs when taking out a personal loan. These file costs are, in principle, clearly stated in the contract. Yet this also makes it more difficult for people to compare loans.
- That is why banks, creditors and brokers are always obliged to clearly state the annual percentage rate or APR of a personal loan. This APR shows the real annual cost of the credit.
- You do not have to be a crack in mathematics when you take out a consumer credit . You should not fling out whether bank A calculates its interest monthly, bimonthly or annually. You also do not need to create an Excel file with all possible costs associated with the personal loan.
- It is sufficient for the consumer to compare the APR of a personal loan with that of another personal credit. The loan with the lowest APR is in any case the cheapest of the two. This is calculated independently of the nominal interest rate and costs.
APR and risk
- A lender using a lower JPK receives a lower fee for lending money. The interest rate is also a reflection of the risk that the lender is prepared to run. A loan with a low APR is therefore more difficult in practice.
- A lender who charges a higher APR will be more risky. The chance that a loan application will be approved is higher. For example, the file of someone who has been blacklisted will always be considered riskier.
- The APR of a personal loan is, like all other loans, limited by the legislator to the top.
- This article emphasizes the personal loan. For the sake of clarity, we would like to mention that this money applies to all forms of consumer credit, such as a car loan or a loan for a motorhome.