With a variety of lenders and loan options to choose from and a ton of complex terminology, the process of finding an affordable loan for your business can be downright frustrating.
Each loan comes with different fees and varying interest rates, so comparing your choices isn’t exactly easy. At first glance, you may think the loan offering the lowest interest rate is your most affordable option—but if you add in all of the attached fees, you may find out that that isn’t the case.
So how can you makes things easier on yourself?
The best possible way for you to compare your business loan choices side by side is to figure out what each loan will cost you overall, which means you need to figure out the APR of your loan.
Follow along to learn everything your business needs to know about APR.
What Is the APR?
The APR, or annual percentage rate on a loan or line of credit is the total price you pay for borrowing funds. In other words, the APR will express the interest rate, loan term, and other fees that may be associated with the loan, such as origination fees and servicing fees.
Do not confuse the interest rate with the APR. The interest rate is simply the cost to borrowing the money. The APR is the overall annual cost of the loan.
Since the annual percentage rate combines the interest rate of a loan, as well as, all attached fees, calculating a loan’s APR could save you from spending more than you expected.
Knowing the True Cost of Your Loan
If you’re shopping around for loans solely based upon price, your first reaction may be to choose the loan offering you the lowest interest rate, and understandably so. Loan fees such as an origination fee or a guarantee fee almost seem too small to make much of a difference, but they do add up.
Let’s say, for example, you’ve narrowed your loan options down to two loans that each charge a 10% interest rate. Looks pretty equal, right? But what you’re missing is that the first loan has fees that add up to an additional 2% and the second loan has fees that add up to an additional 4.5%.
If you add the additional fees to the interest rates, the first loan changes from 10% to 12% and the second loan goes from 10% to 14.5%. Depending on the size of your loan, that small difference could mean thousands of dollars in additional costs!
Calculating The APR
When it comes to calculating the annual percentage rate of your loan, there are a few varying factors that you’ll want to look out for. You should know how long the term of the loan is, how often you’ll have to make payments, if you’ll receive the entire amount of the loan, what additional fees are included, and how the interest is calculated.
Since each lender lists their fees differently, the way you calculate a loan’s APR varies. With a merchant cash advance, for example, lenders list their fees as a factor rate,
Instead of giving yourself a headache and doing all the calculations yourself, check out the multiple business loan calculators out there. All you need to do is choose the loan product you’re working with, input the numbers, and figure out the APR!
What Can Affect Your APR?
When determining your APR for a particular loan, lenders will look into your personal credit history, your business credit history, revenue, profitability and current debt. If you have a history of delinquent payments or a high debt-to-income ratio, lenders will see you as a riskier loan candidate and you’ll probably find offers with higher APRs.
Typically, if you ask a lender what the APR of a loan is, they’ll tell you. If not, calculate it, but never sign a loan agreement without knowing what it’s truly going to cost you.
No one said looking for a loan would be a walk in the park, but now that you know what the APR is, how it varies from the interest rate and how to calculate it, finding the loan that’s right for your business is going to be that much easier.
Thank you to Fundera’s Meredith Wood for contributing to the SmartBiz Small Business blog. She is the Head of Content and Editor-in-Chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and many more.
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