APR

abbr. Fin

Annual or Annualized Percentage Rate of interest: the interest rate that would exist if it were calculated as simple rather than compound interest.

EXAMPLE

Different investments typically offer different compounding periods, usually quarterly or monthly. The APR allows them to be compared over a common period of time: one year. This enables an investor or borrower to compare like with like, providing an excellent basis for comparing mortgage or other loan rates.

     APR is calculated by applying the formula:

APR = [1 + i/m]m – 1.0

In the formula, i is the interest rate quoted, expressed as decimal, and m is the number of compounding periods per year.

     The APR is usually slightly higher than the quoted rate, and should be expressed as a decimal, that is, 6% becomes 0.06. When expressed as the cost of credit, other costs should be included in addition to interest, such as loan closing costs and financial fees.

See also effective annual interest rate.

Also known as nominal annual rate