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Home > QFINANCE Dictionary > Definition of annual percentage rate

Definition of

annual percentage rate

Finance

hypothetical rate based on simple interest the interest rate that would exist if it were calculated as simple rather than compound interest.

Different investments typically offer different compounding periods, usually quarterly or monthly. The APR allows them to be compared over a common period of time: one year. This enables an investor or borrower to compare like with like, providing an excellent basis for comparing mortgage or other loan rates.

APR is calculated by applying the formula:

APR = [(1 + i) / m]m − 1

In the formula, i is the interest rate quoted, expressed as a decimal, and m is the number of compounding periods per year.

The APR is usually slightly higher than the quoted rate, and should be expressed as a decimal, that is, 6% becomes 0.06. When expressed as the cost of credit, other costs should be included in addition to interest, such as loan closing costs and financial fees.

Related definitions of "annual percentage rate"

Definitions of ’annual percentage rate’ and meaning of ’annual percentage rate’ are from the book publication, QFINANCE – The Ultimate Resource, © 2009 Bloomsbury Information Ltd. Find definitions for ’annual percentage rate’ and other financial terms with our online QFINANCE Financial Dictionary.

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