RRP is an indicator that allows you to assess what the actual cost of a loan or credit is. The lower the APR, the better – it means that the loan in question is cheaper. See what you should know about the annual percentage rate of charge.
What is the annual percentage rate of charge? Definition of the term
Annual percentage rateof charge, or annual percentage rate of charge. It is an indicator that takes into account all the costs of a loan, not just its nominal interest rate. The APR is therefore a better indicator of the cost of a loan than the nominal interest rate.
The nominal interest rate on a loan is only one element of its total cost. In addition to the interest rate, the borrower still pays commission, administrative fees and other additional costs. The APR takes all these costs into account, which is why it is a better indicator of the cost of a loan than the nominal interest rate.
Despite this, RRSO is not an indicator of all the costs of a loan. For example, it does not take into account the costs incurred by the borrower if the loan is repaid early. Therefore, before deciding on a loan, it is advisable to compare the offers of different banks and take into account all the costs of the loan, not just its RRSO.
How does the annual percentage rate of charge work?
The annual percentage rate of charge (APR) is a measure used by banks of the cost-effectiveness of a loan. Unlike the nominal interest rate, the APR takes into account all bank fees and commissions that must be paid on a loan. This allows you to compare loan offers from different banks in the market.
How to calculate the annual percentage rate of charge?
The calculation of RRSO is quite complicated and is based on many assumptions. The formula for RRSO takes the following form:
RRSO = (nominal interest rate + fees + commissions) x (number of days in a year / number of days of the loan) x 100%.
The nominal interest rate is the interest rate that must be paid every month for the term of the loan. Fees and commissions are the costs you have to pay for the loan, such as an origination fee, early repayment fee, etc. The number of days in a year is a fixed value, which is 365. The number of days of credit, in turn, is the number of days we will repay the loan.
The APR is therefore higher than the nominal interest rate, and the longer the term of the loan, the higher the APR will be. However, it is worth remembering that the RRSO is only one of the elements to consider when choosing a loan. Other important factors are the interest rate, the amount of the installment, the term of the loan and, of course, creditworthiness.
Annual percentage rate of charge – examples
An example of the APR would be a cash loan of PLN 10,000 for a period of 24 months. The APR in this case is 10.16%. This means that the total cost of the loan will be PLN 12,016.
Remember that the APR is only an indicator that helps compare the cost of different loans and credits. However, it is not the only criterion you should pay attention to when choosing an offer. Always read the contract carefully before you sign it.
