Definition of Annual Percentage Rate (APR) in Crypto

What is Annual percentage rate (APR); This is the amount of interest a borrower must pay each year. The main question here is how to calculate APR? we can do so by multiplying the periodic interest rate by the number of periods in a year of its application. Annual percentage rate (APR) differs from annual percentage yield (APY) by a compounding factor. We will eventually understand both the definition of annual percentage rate (APR) and how to calculate APR after studying this post.

Annual Percentage Rate (APR) Meaning?

The annual percentage rate is a monetary value or reward investors earn by making their crypto token accessible for loans; taking into consideration the interest rates and any other fees that borrowers must pay. Customers stake their crypto assets in different platforms since they offer them a high annual percentage rate (APR).

Some cryptocurrency exchanges don’t allow their customers to lend out coins. Hence, those crypto exchanges that allow, offer different rates. These interest rates fluctuate significantly depending on the sort of loan or currency one lends out.

Exchanges give two basic kinds of loans which are:

  • Fixed lending is same to a bank CD. It helps secures your money for a definite length of time, it normally takes seven to ninety days at a fixed rate. You benefit from this type of lending because of the high-interest rate it accumulates.
  • Flexible lending works in a similar way to a savings account. In this type of lending, you have the option of withdrawing your cryptocurrency although their interest rate is lower.

The world’s largest cryptocurrency exchange Binance by volume, however provides different investment options through Binance Earn; including both fixed and flexible financing.

Investors need to have an understanding of how volatile cryptocurrencies are especially Bitcoin. Hence the amount of interest one earns may vary. Holding and lending cryptocurrency for a long time attracts higher interest rates to investors. Therefore, any change in the price of such crypto will have an impact on investors’ revenue. Investors who take part in fixed loan programs can expect fluctuations in the value of their portfolio; since they cannot touch these coins.

What You Should Know About Annual Percentage Rate (APR)?

Annual percentage rate (APR) can be referred to as the yearly interest investors earn by lending out their assets. APR is a percentage that represents the actual yearly cost of funds over the term of a loan. This does not take compounding into account but includes any fees or additional costs with the transaction. The APR provides consumers with a bottom-line number they can compare among lenders, credit cards, or investment products.

How (APR) Annual Percentage rate Works

APR calculates what percentage of the principal you’ll pay each year by taking things such as monthly payments into account. APR is also the annual interest rate paid on investments without evaluating the compound interest within that year.

The Truth in Lending Act (TILA) of 1968 mandates lenders to reveal the APR they charge to borrowers. Credit card companies advertise interest rates on a monthly basis but must report the APR to customers before they sign an agreement.

Calculation Of APR

One can calculate APR by multiplying the periodic interest rate by the number of periods in a year of its application. It does not indicate how many times the rate is actually applied to the balance

\begin{aligned} &\text{APR} = \left ( \left ( \frac{ \frac{ \text{Fees} + \text{Interest} }{ \text {Principal} } }{ n } \right ) \times 365 \right ) \times 100 \\ &\textbf{where:} \\ &\text{Interest} = \text{Total interest paid over life of the loan} \\ &\text{Principal} = \text{Loan amount} \\ &n = \text{Number of days in loan term} \\ \end{aligned}APR=((nPrincipalFees+Interest )×365)×100where:Interest=Total interest paid over life of the loanPrincipal=Loan amountn=Number of days in loan term

Different Types of APRs

APRs credit card vary on the type of charge. The credit card issuer may request one APR for the purchases, another for cash advances, and also another for balance transfers from another card. The Issuers also charge high-rate penalty APRs to customers for late payments or violating other terms of the cardholder agreement. There’s also the introductory APR—a low or 0% rate—with which many credit card companies try to entice new customers to sign up for a card.

A bank loan generally comes with either of the two types of APRs. A fixed APR loan has an interest rate that possibly does not change during the life of the loan or credit facility. A variable APR loan has an interest rate that may vary at any time.

The borrowers APR charge also depends on their credit. The rates offered to those with excellent credit are significantly lower than those offered to those with bad credit.

Annual Percentage Yield (APY) vs APR

Although an APR only accounts for simple interest, the annual percentage yield (APY) takes compound interest into account. As a result, a loan’s annual percentage yield (APY) is higher than its APR. The higher the interest rate—and to a lesser extent, the smaller the compounding periods—the greater the difference between the APR and APY.

Definition of Annual Percentage Rate (APR)

Lets say that a loan’s APR is 12%, and the loan compounds once a month. If someone should borrow $10,000, their interest for one month is 1% of the balance, or $100. That increases the balance effectively to $10,100. The following month, 1% interest is assessed on this amount, and the interest payment is $101, slightly higher than it was the previous month. If you carry that balance for the year, your effective interest rate becomes 12.68%. annual percentage yield (APY) includes these small shifts in interest expenses due to compounding, while APR does not. Here’s another way to look at it. Say you compare an investment that pays 5% per year with one that pays 5% monthly. For the first month, the APY equals 5%, the same as the APR. But for the second, the APY is 5.12%, reflecting the monthly compounding.

knowing that an APR and another different APY can represent the same interest rate on a loan or financial product, lenders often emphasize the more flattering number, which is why the Truth in Savings Act of 1991 mandated both APR and APY disclosure in ads, contracts, and agreements.3 A bank will advertise a savings account’s annual percentage yield (APY) in a large font and its corresponding APR in a smaller one, given that the former features a superficially larger number. The opposite happens when the bank acts as the lender and tries to convince its borrowers that it’s charging a low rate. A great resource for comparing both APR and APY rates on a mortgage is a mortgage calculator.

The example of APR vs. APY

Say ABC Corp. offers a credit card that levies interest of 0.06273% daily when you Multiply that by 365, and that’s 22.9% per year, which is the advertised APR. with this, if you were to charge a different $1,000 item to your card every day and waited until the day after the due date (when the issuer started levying interest) to start making payments, you’d owe $1,000.6273 for each thing you bought.

To calculate the annual percentage yield (APY) or effective annual interest rate—the more typical term for credit cards—add one (that represents the principal) and take that number to the power of the number of compounding periods in a year; subtract one from the result to get the percentage:

\begin{aligned} &\text{APY} = (1 + \text{Periodic Rate} ) ^ n – 1 \\ &\textbf{where:} \\ &n = \text{Number of compounding periods per year} \\ \end{aligned}APY=(1+Periodic Rate)n−1where:n=Number of compounding periods per year

In this case your APY or EAR would be 25.7%:

\begin{aligned} &( ( 1 + .0006273 ) ^ {365} ) – 1 = .257 \\ \end{aligned} ((1+.0006273)365)−1=.257

If you only carry a balance on your credit card for one month, you will have to pay the equivalent yearly rate of 22.9%. However, if you carry that balance for the year, your effective interest rate becomes 25.7% as a result of compounding each day.

Nominal Interest Rate versus APR versus Daily Periodic Rate

APR can tends to be higher than a loan’s nominal interest rate. This reason is because the nominal interest rate doesn’t account for any other expense accrued by the borrower. The nominal rate can be lower on your mortgage if you don’t account for closing costs, insurance, and origination fees. If you eventually end up rolling these into your mortgage, your mortgage balance increases, as does your APR.

The periodic rate daily, is the interest that is been charged on a loan’s balance on a daily basis—the APR divided by 365. Lenders and credit card providers can represent APR on a monthly basis; as long as the full 12-month APR is available before signing the agreement.

The Demerits of Annual Percentage rate (APR)

The APR is not always accurate when calculating the total cost of borrowing. In fact, it may understate the actual cost of a loan. That’s because the calculations assume long-term repayment schedules. The costs and fees are spread too thin with APR calculations for loans that are re-paid faster or have shorter repayment periods. For instance, the average annual impact of mortgage closing costs is much smaller when those costs are assumed to have been spread over 30 years instead of seven to 10 years.

Lenders have a small amount of authority to determine how to calculate the APR, including or excluding different fees and charges.

APR do runs into some trouble with adjustable-rate mortgages (ARMs). This Estimates always assume a constant rate of interest, and even though APR takes rate caps into consideration, the final number is still based on fixed rates. So this reason is because the interest rate on an ARM will change when the fixed-rate period is over, APR estimates can severely understate the actual borrowing costs if mortgage rates rise in the future.

Mortgage APRs might or may not include other charges; such as appraisals, applications, titles, credit reports, life insurance, attorneys and notaries, and document preparation. There are other fees that are not necessary, including late fees and other one-time fees.

All these are likely to make it difficult to compare similar products because the fees included or excluded differ from institution to institution. Potential borrowers usually calculate the nominal interest rate and other cost information so as to compare multiple offers.

Why You Should Look into Annual Percentage Rate ( APR)?

Consumer protection laws require companies to reveal the APRs associated with their product offerings in order to prevent companies from misleading customers. For instance, if companies did not reveal their APR; a company may advertise a low monthly interest rate while implying to customers that it was an annual rate. This can mislead a customer into comparing a low monthly rate against a high annual one. By requiring all companies to disclose their APRs, customers will be able to make a wise choice.

How a Good APR Should Be

What can be said as a “good” APR will depend on so many factors such as the competing rates offered in the market; the prime interest rate set by the central bank, and the borrower’s own credit score. When prime rates are low, companies in competitive industries will sometimes give very low APRs on their credit products; such as the 0% on car loans or lease options. Although these low rates might seem attractive, customers should verify whether these rates last for the full length of the product’s term; or whether they are simply introductory rates that will revert to a higher APR after a certain period has passed. Moreover, low APRs may only be available to customers with especially high credit scores.

Calculation Of APR?

The formula for calculating APR is very simple. It consists of multiplying the periodic interest rate by the number of periods in a year in which the rate is applied. The exact formula is as follows:

\begin{aligned} &\text{APR} = \left ( \left ( \frac{ \frac{ \text{Fees} + \text{Interest} }{ \text {Principal} } }{ n } \right ) \times 365 \right ) \times 100 \\ &\textbf{where:} \\ &\text{Interest} = \text{Total interest paid over life of the loan} \\ &\text{Principal} = \text{Loan amount} \\ &n = \text{Number of days in loan term} \\ \end{aligned}APR=((nPrincipalFees+Interest )×365)×100where:Interest=Total interest paid over life of the loanPrincipal=Loan amountn=Number of days in loan term.

The Bottom Line

The APR is the basic cost or benefit of money loaned or borrowed. when you calculate only the simple interest without periodic compounding; the APR gives borrowers and lenders a snapshot of how much interest they are earning or paying within a certain period of time. If someone is borrowing money, such as by using a credit card or applying for a mortgage; the APR can be misleading because it only presents the base number of what they are paying without taking time into the equation. Conversely, if someone is looking at the APR on a savings account, it doesn’t illustrate the full impact of interest earned over time.

APRs can be a selling point for so many financial instruments, such as mortgages or credit cards. When you want to choose a tool with an APR, be very careful to a take into account the APY reason is because it will prove a more accurate number for what you will pay or earn overtime. So the formula for your APR may be the same; different financial institutions will include different fees in the principal balance. Be careful of what your APR is bearing before you sign any agreement.

see the list of things to also learn:

  1. Blockchain Technology
  2. Defi
  3. NFTs
  4. DAOs
  5. Crypto
  6. Web 3.0
  7. Altcoin Tokenomics
  8. Metaverse
  9. Smart Contracts

Related Content

Leave a Comment

error: Content is protected !!