When evaluating different business loan options, annual percentage rates (APRs) can help you make an informed decision. Here’s what you need to know about this number and how it works.
What is APR and Why Does it Matter?
The annual percentage rate (APR) is a number that reveals the total interest payment you’ll be making on a yearly basis for the loan term. This percentage helps you compare different financing options based on one metric. Included in the calculation is the base interest rates, plus any additional fees, costs, and charges that may be incurred.
To understand exactly what the APR reveals, see how it breaks down. Be sure to work with a lender who is transparent about all loan costs.
To explore how APR is calculated, here’s a simple example.
If you borrow $100 for a year at 10% interest, you’ll owe 100 + (100 X 10%) = 100 + 10 = $110 at the end of the year.
Next, take 10/100 = 0.10, which means the APR is 10%. The APR is the same as the original interest rate because no additional fees are charged.
Now, consider the same $100 loan at 10% interest for one year, but include a $5 fee. At the end of the year, you’ll owe 100 + (100 X 10%) + 5 = 100 + 10 + 5 = $115.
Now, 15/100 = 0.15, so the APR is 15%. Putting it all together, this one-year, $100 loan would have a 10% interest rate and a 15% APR.
With longer terms, more complex fees, and larger amounts, the calculation can get much more complicated. That’s where loan calculators come in.
Depending on your use of funds, you’ll find a unique loan calculator that will show you the interest rate, APR, term, and monthly payment associated with your desired loan amount. Check them out here:
Learn more about eligible uses of proceeds by visiting SmartBiz University. This crash course, adapted from our own rigorous training program for team members, will guide you through the details you need to know about the small business loan application process.
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* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes and is not the same as scores used by lenders for credit decisions. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.