Why it is important to understand what the APR index is and what it is used for
Knowing the APR, in essence, is important because it allows you to know how much you will actually spend on a loan, a mortgage. Ultimately, this parameter, expresses as data, the total cost expressed as a percentage of the money lost on loan.
Starting from 1 June 2011, in addition, in the calculation of the APR it is also necessary to count the expenses relating to the current account to which one relies, if this is mandatory, due to the new provisions issued by TalyBank to about transparency.
Here, therefore, that the APR is the sum of the TAN, the expenses for the current account, the expenses for the management of the case, the taxes, the stamps, the expenses for the documentation and the preliminary expenses.
How the APR is calculated
Calculating the APR allows you to identify the interest rate on the basis of which the total sum that must be repaid by the customer at maturity is equal to the sum of the credit that the customer receives. The aim of the APR – is to provide the customer with only one indicator of interest, to facilitate it in every operation and to simplify procedures: an indicator of interest that includes all the accessory costs and the effective interest rate on the financing. The law indicates the parameters on which the APR depends. The calculation includes the structure of the financial reimbursement and:
- the expenses of the support current account
- the taxes
- compulsory insurance
- collection fees
- state stamps
- the preliminary costs of the practice.
On the other hand, the parameters that determine the APR are not the sum of the non-compulsory insurances.
An example APR calculation
As mentioned, the APR has as its stated purpose to include the effects of compulsory expenses in view of a loan that must be opened: to obtain it, we imagine a reduction in the lent capital due to the initial costs, with an increase in the installment due to the periodic expenses. Once the necessary corrections are made to the transaction numbers, the APR can be calculated.
Assume, for example, that you are dealing with a 10-year loan for a value of 100 thousand USD without management fees and without opening costs at 5%, with an installment of 1,061 USD per month. In this case, the APR would coincide with the effective rate and would be 5.12%.
On the other hand, the situation would be different in the event that the credit institution requested the payment of initial costs equal to 800 USD: which would mean that the financing would be 99,200 USD, that is 100 thousand USD minus 800 USD. By adding 3 USD per month for the fire policy and 2 USD per month for collection costs, the installment would be – at least virtually – increased by 5 USD. Clearly, the APR would change, not only because the capital would be reduced to 99,200 USD, but also because the monthly installment would not be more than 1,061 USD but 1,066 USD. In short, the APR would rise to 5.41%. Translated in a nutshell: the financing costs are zeroed because the costs are transformed into interest. From here you can understand what the APR is for, an indicator that allows you to compare without spending anything the different financing proposals that could be used.
Difference between TEG and APR
Lastly, it should be pointed out that the APR is a very different thing from the APR: the former, in fact, is an ex ante rate, in the sense that it can be calculated in advance for the loan contracts in which the amortization plan is illustrated, while the latter can only be calculated a posteriori, since it is the result of the overall cost of credit which is represented as an annual percentage. Among other things, the Global Effective Rate (TEG) excludes financial charges, differentiating in this from the APR, but on the other hand it takes into account the costs for guarantees and insurance even if it is not compulsory insurance for the getting money.
In conclusion, the APR is a cost indicator which proves to be very useful for all those who are about to apply for a loan, because it allows you to know what the overall expenditure for that loan will be: it is a parameter that deserves to be taken into consideration and evaluated with the utmost attention.