APR

Full form: Annual Percentage Rate

Loans & Credit

APR is the true annualised cost of a loan including interest rate plus all fees, processing charges, and other mandatory costs. APR is always higher than the stated interest rate and is the only fair way to compare loan offers from different lenders.

In detail

When banks advertise a home loan at 8.5%, that is just the interest rate. The APR includes the processing fee (0.5-1%), legal charges, insurance premiums, and any other mandatory costs expressed as an annualised rate. RBI mandates that banks disclose the Annual Percentage Rate on all loan products in the Key Fact Statement.nnFor a Rs 50 lakh loan at 8.5% with a Rs 25,000 processing fee, the APR is approximately 8.65%. For short-tenure loans, fees have a much larger APR impact because they are spread over fewer months.

Formula

APR = [(Total interest + All fees) / Principal / Loan term in years] x 100 More precisely, APR is the IRR of all cash flows including disbursement, fees, and all repayments.

Real-life example

🇮🇳 India example

Bank A: 9% interest, Rs 5,000 processing fee on Rs 5L loan for 3 years. APR = 9.42%. Bank B: 9.25% interest, zero processing fee. APR = 9.25%. Bank A sounds cheaper but Bank B is actually lower cost. Always compare APR, never headline interest rate.

Frequently asked questions

Is APR the same as interest rate? ▼

No. Interest rate is just the cost of borrowing money. APR includes interest rate plus all mandatory fees and charges expressed as an annualised percentage. APR is always equal to or higher than the interest rate.

Where can I find the APR for my loan? ▼

RBI requires banks to provide a Key Fact Statement (KFS) before loan disbursal which includes the APR. Always request and read the KFS before signing any loan agreement.