In the present-day scenario of highly volatile market situations, your personal finances are often stretched to the limit, so you need to take care of your monthly expenses. In case any financial emergency comes up, you may need to use your personal income and therefore reduce savings. However using your savings is not an ideal solution to any financial problem and leaves you vulnerable. As a result, you need an option that can help you meet your financial requirements without affecting your personal savings.
Personal Loans are unsecured loans that are offered by various financial institutions to their customers. These loans do not need any collateral and have monthly EMIs (Equated Monthly Instalments) going up to 60 months. Personal Loan types and rate of interest vary from lender to lender,and the amount can be used for any personal need of yours such as the renovation of the house, further education, repayment of Credit Card dues and any other requirement that you may have. When you apply for a Personal Loan, you must understand various financial terms, so that you do not suffer any losses thereafter. One of the most vital concepts that you must understand is “APR.”
APR stands for Annual Percentage Rate. This term is used to signify the actual cost of the loan for a year. It includes the interest cost as well as other charges that may be applicable to the loan you are applying for. In simple words, APR is the price of loan quoted in terms of rate of interest. It is imperative to calculate APR while you are considering various Personal Loan types, as it helps you understand that how much it is going to cost you to borrow and then you are in a better position to compare various loans and take an informed decision. APR is calculated as an annualised rate,and it helps you understand your interest liabilities against a loan for an entire year.
When you are doing your research for a suitable Personal Loan, you must pay close attention to the APR. It isimperative that you’re able to calculate APR for different loans correctly as only then can you make an informed decision. Here are a few things to keep in mindwhile calculating APR for different Personal Loan types:
APR is a better indicator of the total cost of a loan as compared to the interest rates. APR includes all the charges that must be paid in a year along with the EMIs.If a Personal Loan does not have any hidden costs, then the APR will be equal to the interest rate. Remember that APR does not include late payment and penalty charges for cheque bounce.
If you delay your repayments, your APR will turn out to be higher than what you had anticipated. It is expressed in percentage and calculated as a ratio of the balance amount of the loan.
Different lenders have different parameters to calculate the APR against their Personal Loans. Also, there is no standard APR as different APRs are offered to different borrowers by the lenders as the APR is affected by many individual factors such as:
Your credit score has a significant impact on your APR. If your credit score is above the specified threshold, your APR would be lesser as compared to a lower credit score.
When you are doing your research for identification of an ideal Personal Loan, APR serves as a reliable estimate of the actual cost of the loan. Interest rates can be deceptive,i.e., some lenders might offer incredibly low-interest rates but place significantly high additional charges, that takes the total cost of the loan on the higher side. When you have an APR figure of various Personal Loan offers, the comparison becomes significantly more comfortable.
Going by APR is also not recommended while selecting a Personal Loan. You should also pay attention to the repayment terms as they can affect the overall cost of the loan. For example, if you choose extended repayment tenure, then the total interest payment from your pocket is going to be higher irrespective of the APR.
Similarly, if you prefershorter repayment tenure, the total interest cost would be lesser regardless of the APR. As such, APR should be studied in combination with the repayment terms to get an accurate estimate for better comparison.
Going for a Personal Loan is a significant commitment on your part,and therefore you must familiarise yourself with all the technical terms and conditions so that you are able to get the best deal to fund your financial needs.
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