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What is Annual Percentage Rate?

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The annual percentage rate is a feature of loan borrowings. This form of calculated interest rate applies to both loans and amounts owed to credit card companies. Some trade experts are of the opinion that this form of interest better suits customers who intend to have extended relationships with their banks and/or credit card companies. This calculation of interest is also government regulated. In the United States, for instance, the specifics of the calculation of the annual percentage rate are regulated by the Truth in Lending Act. The final calculated amount is also a merger between the purist forms of nominal annual percentage rate and Effective annual percentage rate. The difference between the two forms is the simple and compound interest that is used to calculate the total sum due.

Different countries will have different variant regulations on the calculation the annual percentage rate. Though there are some standard regulations and definitions, each country`s finance department may choose to highlight one method over the other. There are two basic types of annual percentage rate – the nominal and the effective.

The Nominal variety is calculated using simple interest for the period (say, for instance, one year). There are no extra costs or fees added to the simple interest rate calculated. The effective annual percentage rate takes into consideration the compound interest rather than the simple interest. This compound interest is taken in addition to the fee, calculated for the period of one year at a time.

The annual percentage rate therefore is calculated on a yearly basis rather than on monthly basis. This interest rate is applicable to mortgage payment, credit card debts and other loans. The advantage of using compound interest over a simple interest calculated every month and then added to the total is that the interest rate is considerable lower on the total when the interest is annualized.

Each bank or finance agency utilizing the APR system has to disclose their final figures to their respective regulatory bodies who in turn hand them over to the overseeing finance department of the government. As mentioned above, the regulations on the calculations differ from country to country, however all banks, (multinationals will be required to submit their number to the countries that are hosting them) will be required to disclose their final numbers to the governing bodies. The APR is variable. It changes to keep pace with the current economic trends in the country.

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