The APR is one of the most difficult rates to understand by the user, who should be familiar with it because it applies to the most common financial products: loans and savings.
In this article, we will try to explain exactly what the TAE is and how to calculate it, in order that you know better how much you are going to actually pay for a loan or what real benefit you are going to have for the deposits of your savings accounts.
First of all: what is the APR? They are the acronym of Annual Rate Equivalent or also Effective Annual Rate. To really understand it, it has to be compared with the nominal interest rate, that is, what is commonly called “the interests of the bank”. The nominal interest rate is the percentage charged by the bank in each letter or term, which can be fixed or variable.
On the other hand, the APR is the value that comes closest to the real share because, in addition to the nominal interest rate, it also includes other associated expenses, all of which is weighted with the repayment term of the loan. In the case of credits, the opening or early cancellation expenses, among others, are included. In the case of savings products, those for periodic benefits settlement, for example, are included.
And we say “the value that comes closest to the real share” because in certain cases there are other expenses that can not be included in this APR because they are not attributable to the bank, such as notary, insurance, etc. This happens mainly in mortgage loans, which are the most complex.
Where we find the APR
As we have anticipated, the APR is mainly found in three types of financial products, very common because they are present in our day to day:
- In savings products: savings accounts, savings insurance, etc. What the TAE represents here is the benefit generated by the money deposited. It is always lower than the nominal rate since the APR includes the expenses associated with withdrawing the money from the deposit, the so-called settlement expenses.
But the APR that interests us the most in this article is the employee in the loans:
- In personal loans, whatever their purpose. In this case, the APR is practically equivalent to the actual expenses involved in the repayment of the loan, since it is a small amount and a shorter term, it has much less associated expenses, although it always depends on the credit institution that grants the loan. loan. This rate is paid in the online microcredits of.
- In mortgage loans. In these cases, the amount resulting from calculating the APR percentage and what is finally paid can vary considerably, since being a large loan with a long term, a house is usually mortgaged (whether or not it is purchased with the credit) as a guarantee of payment to the bank. Therefore, the appraisal of the property, the insurance of the house and the credit itself, the taxes of the public administrations, etc. are excluded from the TAE.
How to calculate the APR
Calculating the APR is a complicated task because the rate itself is complex. Therefore, since 1990, financial institutions have been obliged to report this data from the beginning, even from the time of the advertising campaign.
However, any person can also perform the mathematical calculation of what is the APR percentage of their financial operation, if so it is quieter. For this, there is a very useful tool: the Banco de España simulator. The data that we must necessarily have in order to carry out this simulation is the initial capital, the nominal interest rate, the origin or constitution expenses, and the periodic expenses, both expressed in an amount in euros. In addition, you must specify what is the period of those expenses (monthly, quarterly, annual) and the term of repayment or repayment of the loan.
It is worth remembering that there is no fixed or unique value for the APR. Each credit institution establishes it according to its criteria or according to the profile of the client.
A practical example of how to calculate the APR
But when we talk about calculating the APR, we mainly refer to calculating the amount of money we will actually pay as a result of requesting a payday loan online direct lender. And you will understand this better on this website.
Let’s say that we request € 3,000 with a return period of 3 years (36 months), with an opening commission of 1.50% and a nominal annual interest rate of 9%: it will result that the APR is 10.51% and the fee to pay will be € 95.40.
This calculation has been made with another tool from the Bank of Spain, in this case, a benchmark simulator to calculate personal loan installments. Its use is recommended, otherwise, it would be necessary to resort to complex mathematical formulas.
A final clarification: the amount paid for interest is not the same month by month, since we speak of the compound interest rate, the most common in these operations, and according to which the interest generated in a period is added to the initial capital to generate new interests. Therefore, if the calculation of interest is made only on the initial capital (€ 3,000), we would be calculating it as a simple interest rate and then the final amount would not coincide with the result of the simulator, which does take into account the type of compound interest.