The APR is the acronym for the equivalent annual rate and is a financial term that is used with great frequency to detect the interest rate of different financial products. Both from those intended for savings and any line of credit since it will always be done in the same way. It is the real expression of the cost o effective yield annual of a financial product regardless of its term. To the point that on more than one occasion you will have looked at their ratios to determine the convenience or not of the operation.
When looking for a personal loan, term tax or even the yield of dividends on the stock market, you will surely have set yourself the amount of the APR or equivalent annual rate. Because it will be a very important factor for the spending or saving that you will have in the selected financial product and that are generally regulated by the monetary bodies. A very important aspect is based on not confusing it with the TIN since it is not the same thing. Because the TIN is a fixed percentage that the bank receives for assigning the money, despite the fact that at some point or other it may confuse them.
But do you really know what APR is, what it is for and how is it calculated? Below we will explain any questions you may have about this financial term so that from now on you can select the best financial product and of course the one that interests you the most at all times. Because you should also know that this important rate it is not always the same and it varies depending on various parameters that can make its calculation more complex. It is perhaps the biggest problem that it entails for its correct understanding.
APR: how is it calculated?
We come to the most relevant part of what is the equivalent annual rate. That is, how do you get to calculate it and know what will be the financial product that we are going to find in front of our table. Well, in this sense, the APR links, through a mathematical formula, the interest rate that is applied and the terms in which interest is paid. Generating an interest that is what in the end you will have to receive or pay when contracting a financial or banking product.
In any case, it is used as a reference interest rate to standardize different types and conditions of loan and credit operations. In particular, when this class of financial products contemplate different periods of settlement, expenses and even commissions. It is a way to group all these products under the same mathematical formula and that allows you to obtain the interest rate that you are going to pay or receive. Although there are differences between what are savings products and outright financing.
APR on savings products
The equivalent annual rate is calculated to determine the performance of the different savings products. Among those that stand out current accounts, time deposits, bank promissory notes and any other of these same characteristics. This rate will correspond to the benefit of the operation or contract and there will always be sensible variations among some of them. In other words, at the moment the yield on bank deposits over a 12-month term is 0,12%, which is the APR calculated to offer users of this class of products.
On the other hand, you cannot forget that in order to calculate them correctly, the frequency of payments (monthly, quarterly, yearly, etc.). Because in effect, an equivalent annual rate for a product contracted with monthly payment is not the same as annual. Not surprisingly, it will be clearly differentiated based on this important accounting factor. Like many others that you can imagine from now on. This is its greatest complexity, although banks can help you to obtain all kinds of help in this regard.
Product profitability
As is logical to think, as the APR is higher, your income will increase proportionally with the rise. From this perspective, an equivalent annual rate of 3% is always better than one of 1%. This is an aspect that is very clear to many of the banking users and above other technical considerations to make their final calculation. On the other hand, with some frequency and in many cases the compliance with the standard leaves much to be desired to the point that the user is not correctly informed about the final result of this mathematical operation.
To reach this special rate, you only need access to three fundamental data. Do you want to know what these parameters? First, the cash price, then the amount you pay or receive through the banking operation and finally the amount of the Monthly fee. If you are more or less clear about these data, the task will be easier for you to understand perfectly because it is the most difficult part of this process. It is not surprising that many consumers have certain problems reaching their final amount.
In lines of credit
The equivalent annual rate also applies to any kind of finance company, without any kind of restrictions. That is, in personal loans, consumer financing or mortgages, among some of the most relevant. As the APR rises, it means that it is costing you more money to finance yourself. To the point of considering any APR above 20% or 25% as clearly abusive and that in any case it is not convenient for you to hire. Among other reasons, because it can increase your level of debt for the next few years. It's that simple.
From this approach, the equivalent annual rate can be perfectly equated with what is the real interest of financial products. It is the money that banks will ask you for for demanding a product of these characteristics. Beyond the other conditions that are imposed on you at the time of hiring. If you want to save a few euros, there is no doubt that you should look for a product with a lower APR. The more it is, the better it will be for your personal interests because at the end of the day you will have to pay less money for the credit line subscribed.
Information about this rate
Either way, if you see the APR advertised in all offers of mortgage loans, personal loans and savings products, it is because the Bank of Spain obliges entities to report about this relevant data. Although sometimes they try to camouflage it under the TIN or in a wrong way. If you have any doubts, you will have no choice but to consult the interest of the product before hiring it, since later you will not be able to do anything and you will have to comply with your obligations as a bank user.
On the other hand, the equivalent annual rate or APR is a perfect thermometer on the real state of financial products, whatever they may be. It can even help you choose the most competitive of all and save a few euros in the operation. Although in any case, they will never be fixed, but on the contrary, they will vary over the years each time the interest rates are updated. This is one of the constants that characterizes this annual rate. Even to opt for a fixed interest rate rather than a variable one or vice versa.
Compared under the same terms
One of the keys to its correct understanding is based on making comparisons on the same financial product with the same deadlines, never with different parameters. That is, it does not make sense for you to compare financial products with the same term because the operation does not make any sense. For example, make a comparison between a 3-month tax and a 2-year tax. In this case, the data will be completely distorted from all points of view. To the point that it won't do you any good.
Another aspect to take into account from now on is that in no case will the equivalent annual rate take into account the taxation. Quite the contrary, what ultimately determines are the gross interests of the selected financial product. Although when hiring it, you should not look only at the APR, but also at all the conditions of the contract and that can be many and of different nature. On the other hand, it is very important to know that what the bank is really paying you is the nominal interest, that is, the TIN. Perhaps this little detail will help you to understand it exactly.
Finally, it should be noted that the equivalent annual rate is one of the hooks that banks use to subscribe their products. Even with a certain distortion of what is the reality of them. In any case, it is one of the most important parameters in which you should look at any financial or banking product. Because it affects your money.