You might be shopping around for small business loans to help you with financing, but getting the most suitable loan can be tricky. A key factor in making sure you get the best loan for your needs is to determine what is the Simple Interest Rate and Annual Percentage Rate (APR) from the available options. The interest rate and APR of a loan will give you an overview of how much you’ll pay for the loan in the short and long term. It will also give you an understanding of how it’s going to cost your business.

You don’t need to be a rocket scientist to understand all the terms and fees included in your business loan. We prepared a guide to give you a good grasp of how interest rates and APRs will affect the cost of loans.

The Difference Between Simple Interest Rate and APR

The simple interest rate accounts for the interest a lender will charge you for the loan, and that doesn’t include the additional fees tied to it. APR, on the other hand, is the annualised interest rate together with other fees such as compound interest, amortization rates, and lender fees.

Both simple interest rate and APR are expressed as a percentage of the principal amount you are borrowing. Both also indicate the amount of money you’ll have to pay on top of the loan amount.

But the true difference between the two lies on the fact that the simple interest rate shows just a portion of how much you’ll pay and the APR gives you a complete view of the entire cost of the loan. The simple interest rate entails the basic cost of the loan. On the other hand, the APR shows the total cost of the loan including the additional fees a lender requires.

Between these two rates, the interest rate just shows the basic cost and the APR the total cost of the loan. The APR (expressed in a percentage) would generally be lower than the interest rate.

In some cases, a lender will just provide you with either the APR or interest rate when you apply for a loan. As a small business owner, you have to take note of the full details regarding these rates to be prepared for tackling repayments.

Let’s take a look at the details on these two types of interest rates.

An In-Depth Guide to APR and Simple Interest Rate

What is Simple Interest Rate?

A simple interest rate, also known as nominal interest rate, is the interest you’ll pay for borrowing the money (or principal amount). It is expressed as a fixed percentage of the principal you are borrowing. From this amount, lenders will be able to make money from the amount they’ll loan to you.

To determine the simple interest, you can use the formula: Simple Interest = Principal x Interest Rate x Loan Period (in years).

For example, if you’re charged 12% interest rate on a $15,000 loan you have to pay in 1 year, the calculation would be: 15,000 x 0.12 x 1 = 1,800. You’ll have to pay $1,800 over the course of the loan.

What is APR?

The Annual Percentage Rate of a loan will give you an overview of how much you’ll actually pay when you borrow money. It’s the true annual cost of your loan expressed as a percentage. To calculate for the APR, you need to know the interest rate of the loan, the total amount you’ll borrow, the repayment terms, and the cost of any fees. The following are the usual fees included in the APR.

  • Application Fee
  • Origination Fee
  • Documentation Fees
  • Underwriting Fee
  • Guarantee Fee
  • Processing Fee
  • Service Fee
  • Closing Fees

You’ll find that different lenders charge different fees. You have to ask further details from your lender on what are the extra charges included in the APR. Most of these fees are usually one-time or upfront costs. All of these fees are expressed as a percentage of a loan.

To calculate for APR on an interest-based loan, use the formula: Annual Percentage Rate = Periodic Interest Rate for m Months x 12/m.

For a discount loan, the APR would be: Annual Percentage Rate = Finance Charge/Amount Financed x 12/Term of Loan in Months.

The finance charge refers to the other fees included in the loan contract. This is calculated as: Finance Charge = Principal x Interest Rate x Term of Loan in Months/12.

For example, a loan with an APR of 6% means that you’ll pay $6 each year for every $100 you owe.

Another example is when you calculate an APR on a $1,000 loan that has a $400 finance charge within a 3-month term.

The result is: APR = 400/1000 x 12/3 = 1.6

1.6 multiplied by 100 is 160% – which is the final value of the annualised percentage rate.

Let’s take a look at a more agreeable loan that has a 10% APR, with a loan amount of $15,000 and loan term of 12 months.

The calculation would be 0.1 = Finance Charge/15,000 x 12/12

The finance charge of the loan would be $1,500.

There are also different types of APR which you might encounter in getting a loan. These include:

  • Introductory APR: This kind of promotional APR is typically at 0%. It applies for a period of time after opening an account. The 0% APR allows you to carry a balance for every month without getting charged with an interest. However, you do have to make the minimum monthly payments.
  • Balance Transfer APR: This applies to any balances transferred from one card to another. It is usually charged on the date you make the transfer.
  • Cash Advance APR: This type of APR is charged from withdrawing cash from your card’s line of credit. This rate will be typically higher than other APRs.
  • Purchase APR: Your purchase APR is the rate you’ll pay on credit card purchases that aren’t repaid by the end of the billing cycle.
  • Penalty APR: This may be incurred if you miss a month’s repayment. If your line of credit has a higher APR, it may result into damage to your credit.

When getting a loan, you need to ask what type of APR it is – whether that’s a fixed APR, variable APR, or starting APR.The starting or variable APR would usually seem small, but the costs would be incremental. The fixed APRs you’ll find from different loans – whether that would be payday loans, mortgage loans, lines of credit and others – would usually vary from 10% to 220%.

An In-Depth Guide to APR and Simple Interest Rate

How to Use This Knowledge of Simple Interest Rate and APR

Now that we’ve covered the terms and calculations of interest rates, it’s time for you to check out loans that are within the scope of your repayment budget. You can also use this Business Loan Calculator if you need a quick overview of how much loans can cost you.

When you are researching for loans, take note of the APRs to determine which loans cost less on an annual basis. You also have to keep in mind that the APR will vary depending on the loan period, so you have to double check on the rates.

Take for example choosing between an 18-month loan and a 15-year loan that have the same interest rates and fees. However, their APRs will be different. The 15-year loan spreads out the repayment fees over a longer period of time, and thus it will show a lower APR than the 18-month loan. If you look at the bigger picture, you’ll still end up paying more money in interest on the 15-year loan than the 18-month loan.

In short, when you compare the APRs of loans, check out if they have the same length of time to repay. This will give you an accurate view of how much the loans really cost.

What Affects the Simple Interest Rate and APR from a Lender

You might wonder how lenders impose interest rates and APRs for the financial products they offer. These rates will mostly vary according to the lender you’re seeking out, your business’s credentials, the type of loan you want to get, and the loan period.

Lenders have the capital to give loans to individuals and businesses, and they will always want to mitigate the risks in lending money to anyone. They also need assurance that they are going to get their money back, together with the interest they want on top of that. Therefore, a big factor would be how well they can entrust the money to a particular business.

Here are some key factors that affect your loan’s interest rate plus other fees that lenders include in your APR. You would have to indicate most of these in your business loan application.

  1. Personal Credit Score: Your credit score sums up your credit report into one number. Lenders will get a feel of your financial history through this value. It will also show lenders how trustworthy you are as someone applying for a loan. Some lenders may also ask for your business credit score to know the health of your business’s finances. You can check your credit score for free through the national credit reporting bodies listed on this site.
  2. Industry of the Business: There are lenders who view certain businesses as riskier than others. If lenders feel that a business in your industry is more likely to lose revenue or go down before the full loan repayment is due, then they might be more wary to get your loan request approved. In other cases, they might hike up the interest rates so they can mitigate their risks.
  3. Business History: The longer the time that the business has been running, the more that lenders will sense a stronger stability in finances and income generation. On the other hand, newer businesses are known to be less financially stable, so lenders would levy higher interest rates as a sort of safety net.
  4. Profitability and Annual Revenue: Lenders will get a sense of the profitability or annual revenue of your business when you’ll be asked for business banking transactions, financial statements, or other balance sheets. Less interest would usually be given to businesses who show a good profit every month.
  5. Existing Debts: Lenders would usually favor businesses who have fewer financial obligations, such as existing debts or loans. Lesser debts or loans would mean that a business has more room in their budget to repay a new loan. In such case, lenders would charge lower interest rates for it.
  6. Lender Available: Different lenders would offer various interest rates and other loan fees. SBA Loans and Bank Loans charge the lowest interest rates, but they would require extensive documentation and collateral. There are also alternative lending solutions that are open to a wide range of borrowers and require less documentation, but may charge higher interest rates.

An In-Depth Guide to APR and Simple Interest Rate

In a Nutshell

Before you jump right into getting a business loan, always ask the lender for more details about the interest rate and the APR. Some loans may have low monthly payments or interest rates, but there might be underlying fees that can go beyond what you can handle. Read the fine print and ask the lender to give you a no-holds-barred understanding on what it entails to get a loan from them.

It is highly recommended that you use APR to determine whether you should get the business loan being offered. The APR will be the most transparent way to know how much you’ll be paying for the entire loan. It reveals the true cost of the loan, which the simple interest rate doesn’t necessarily show. By assessing the APR of loans that have the same loan term, you’ll be able to pick which one is best for you.

BizzLoans offers the best interest rates in New Zealand for entrepreneurs who want to get the most out of financing. We match the best financial products for business owners in NZ, and have helped thousands to grow their ventures. If you want to start seeing the best business loans available for you, please click the button below.

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