When it comes to borrowing money, many people look the interest rate they are receiving as the barometer for the amount of interest they are currently paying. However, the true amount someone is paying is the APR or Annual Percentage Rate. The Annual Percentage Rate takes into account the compounding interest that occurs in many loans. The APR formula is not the same in every country.Here's how to calculate the APR using the formula UK financial institutions use.
Learn the APR equation that is used in the United Kingdom: p = E ( a / (1 + r / 100) ^ t In this equation "p" represents the principal borrowed, "a" is the amount of a single repayment, "r" is the interest rate and "t" is the time since the loan began. The "E" is meant to represent the sigma symbol which instructs that all calculations after this must be added together. This is because in the United Kingdom each piece of interest is added together to get the final result. So if it is a 12-month loan, there will be 12 additions performed. If it is a 60-month loan, there will be 60 additions performed.
Try the APR on a sample equation. You can put the formula to work by practicing on a simple equation. Say that someone is seeking a six-month loan from a bank to bridge the gap for some unforeseen expenses. The bank has agreed to lend you £12.000, with payments of £2,200 per month for six months. What's the APR?
Calculate the equation. To figure the APR in the United Kingdom, the equation would be written as follows:
12,000 = [2,200 / (1 + r / 100) ^ 1/6] + [2200 / (1 + r / 100) ^ 2/6] + [2,200 / (1 + r / 100) ^ 3/6] + [2,200 / (1 + r / 100) ^ 4/6] + [2,200 / (1 + r / 100) ^ 5/6] + [2,200 / (1 + r / 100) ^ 6/6]
Once you have performed this equation, you'll find that the APR is 39.2 percent. Remember it is quite high because the term of the loan example was only 6 months, but was kept short for example purposes. You can now plug any monthly payment and loan amount into this equation and figure your APR.