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Trading and Investment Terminology

Annual Percentage Rate(APR)

APR or Annual Percentage Rate is a very common term in the banking world.

This term might confuse first-time loan borrowers.

 APR is the interest applied to the total amount of loan borrowed by an individual in a year.

There are three ways of computing an effective annual percentage rate:

  1. By compounding the interest rate for each year, without considering fees
  2. Origination fees are added to the balance due, then the total amount is treated as the basis for computing compound interest
  3. The origination fees are paid in full as a short-term loan. This loan is due in the first payment and the unpaid balance is paid as a second long-term loan.

In other words, APR is the method to compute the annual cost of the credit that you have taken from a particular bank. 

It consists of 

The actual interest rate

The processing fee

Foreclosure amount 

And all other fees charged by a bank on the loan.

 

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