The annual percentage rate (APR) is a standardized way to express the cost of borrowing money. It is the rate that includes all interest charges, fees, and other costs associated with borrowing money, as a yearly percentage.

Formula for APR:

APR = (1 + interest rate/n)^(n * years) - 1

where:

• APR is the annual percentage rate
• interest rate is the monthly interest rate
• n is the number of times per year that interest is compounded
• years is the number of years for which the loan is taken out

Key Considerations:

• APR includes all costs: The APR includes all interest charges, fees, and other costs associated with borrowing money.
• Standardized measure: The APR is a standardized measure of cost, making it easier to compare loans from different lenders.
• Interest compounding: The APR calculates interest on a yearly basis, assuming that interest is compounded monthly.
• Fixed vs. variable rate: The APR for a fixed-rate loan is constant throughout the loan term. For a variable-rate loan, the APR can change over time.
• Impact on borrowing cost: A higher APR will result in a higher cost of borrowing money.

Example:

If a loan has an interest rate of 5%, compounded monthly, and the loan is taken out for 5 years, the APR would be:

APR = (1 + 0.05/12)^(12 * 5) - 1 = 5.67%

Therefore, the annual percentage rate (APR) is a comprehensive measure of the cost of borrowing money that incorporates all related charges and fees. It is a standardized rate that allows for easy comparison of loans from different lenders.