How Costly Is Your Loan? From October, Look At The Annual Percentage Rate For Answers
Annual Percentage Rate will give a better picture of the actual cost on a loan.
One of the main points that borrowers consider while taking a loan is the interest rate that is charged to them. A higher interest rate can mean a higher cost for the borrower but at the same time the manner in which the interest is calculated is also important as this impacts the final cost. Now the Reserve Bank of India (RBI) has asked banks to disclose another rate known as the Annual Percentage Rate (APR) from October 2024 to borrowers to enable them to get a better picture of the entire situation. Here is a detailed look at the impact of APR on ordinary borrowers.
Annual Percentage Rate
The interest rate charged on a loan represents just one part of the total cost that the borrower has to bear. While it would be the most important and significant cost the borrower might incur, there could be several additional charges that are present. These could be items like processing fee, administrative fee or even legal charges if they have to be paid by the borrower. The APR considers the interest as well as the other charges that are there on the loan. These are then used to arrive at an annual cost and this is measured in percentage terms. The presence of the APR means that the borrower does not have to look at the interest along with other individual charges and then try and understand what their actual cost will be. They can just look at the APR and get a clear idea about what they’re paying on the loan. This becomes one single figure that gives the whole picture about the loan cost.
Comprehensive Picture
One of the best things about the APR is that this is one figure that gives a comprehensive idea about the loan cost to the borrower. All the elements that comprise the cost are included so nothing is excluded. This shifts the whole balance of responsibility on the loan provider for giving the information at a single place. The borrower doesn’t have to go and find out about the other costs that can vary from bank to bank. Currently it isn’t easy to get a comprehensive picture about what is the final burden. Since the APR would have all the details within it there would be no need to do additional running around by the borrower when they’re comparing loans.
Easy Comparison
The best benefit of such a situation is that a borrower can make their decision in an easy and proper manner. A person has to compare loans from several lenders before they make a decision. This becomes a tough task when all the details about the costs have to be gathered separately and then calculated. On the other hand, the presence of the APR means that there is an easy comparison that they can make. So, when it comes to the cost element they can just look at the APR as the basis for comparison. Building on this, the borrower can also add the other features and details related to the loan while making the final decision.
Less Work And Stress
The benefit of this entire exercise is that the work for the borrower reduces significantly. In case there is just the interest cost available then they have to look at each additional charge such as processing fees, administrative fees, etc., and then do the calculations on their own. Here the problem is solved because the APR gives all the details within the number that is generated. This make the process less stressful and easier to complete which can be a big relief in the process of taking a loan.
Arnav Pandya is founder of Moneyeduschool
