What is the Annual Percentage Rate?

What is the annual percentage rate (APR)

The annual percentage rate (APR), or effective rate, shows the full cost of a loan as a percentage per year. It includes not only the interest for using the money (the nominal rate) but also all mandatory costs: the arrangement fee, monthly service charges and any other fees without which the loan is not granted. That is why the APR is almost always higher than the nominal rate and gives a more honest picture of what the loan really costs.

In all EU countries, the APR is calculated using a single formula set by the European Consumer Credit Directive. This means it can be compared between different lenders and even between countries — whether the loan is in Latvia, Germany, Spain or Poland.

Why the APR matters more than the nominal rate

A nominal rate may look attractive, but once fees are added, the real cost of the loan can be considerably higher. This is especially noticeable on small, short-term loans.

Example. A loan of 1,000 EUR over 12 months at a nominal rate of 10% a year with a 50 EUR arrangement fee. The nominal rate is 10%, but with the fee included, the APR is about 22%. A fee of just 50 EUR more than doubles the real cost of the loan.

So be careful with ads promising “a loan at a very low interest rate”. Check the APR and the total amount to repay: they show what you will actually pay. The interest-free first loan that many lenders offer new customers can genuinely be free — but only if you repay it on time. If you pay late, interest and penalties are charged.

What the APR depends on

The APR varies widely depending on the type of loan. It is usually lowest for mortgages, higher for consumer loans and highest for fast loans, which makes them the most expensive. The higher the APR, the more carefully you should check whether you can afford the loan.

Calculating the APR yourself is difficult: in addition to the nominal rate, it depends on the repayment schedule, the loan term, all fees and other mandatory costs, such as insurance if the loan cannot be granted without it. The only costs not included are those you can avoid, such as late payment penalties. Fortunately, you don’t need to calculate it yourself: in the EU, lenders must state the APR in the contract and the offer, and give a cost example with the APR in loan advertising.

Also bear in mind the specifics of individual countries. In Sweden, for example, part of the interest on loans can be deducted from tax, whereas in most other countries, including Latvia, there is no such deduction for consumer loans. So when comparing loans in different countries, go by the APR and the total amount to repay.

APR in the AllCredits catalogue

On lenders’ cards we give cost examples with the APR wherever possible, to make offers easier to compare. To learn more about what makes up the cost of a loan, see the article “How much does the credit cost?”. For lenders by country, see Credits in Latvia, Credits in Europe — North & West and Credits in Europe — South & East.