What is APR? Finances can often be as confusing and opaque as a David Lynch movie to people who are not in the business. Never-ending acronyms, fine print that’s painfully small, and the selling spiel every lender has; getting the best loan for your small business can be overwhelming in the face of all of it. One of the most important parts of any loan is the APR, or the annual percentage rate.

The interest rate and the APR tell you two different things about the cost of your loan. Understanding the difference between the two can help small business owners figure out the best loan for them and their small business. The interest rate will speak to the rate at which small business owners will be charged for borrowing the money. The APR is a more holistic look at the costs associated with borrowing.

Let’s walk through the pertinent info about APR: what it is, why it’s important, and how you can calculate it on your own.

What is APR?

The Annual Percentage Rate (APR) is the total cost per year of borrowing the money. Unlike the interest rate alone, APR takes into account fees, closing costs, and other charges the lender doesn’t use to calculate what the interest rate on a loan will look like. This means the APR will be higher than the interest rate.

When small business owners are given two options that have the same interest rates and fees but different APRs, they should ask the lender what additional costs are going into the APRs to make them different.

Why is the APR important?

The APR of a loan, taken into consideration with the interest rate, can be used to determine which loans are best suited to a small business’s financial needs.

A low interest rate on a loan can often draw in unwary small business owners. Keep in mind that a low interest rate isn’t the only thing determining the suitability of the loan. If that “low, low interest rate” is compounded daily or there are more fees than were originally advertised, the cost of that loan will be higher over time.

Taking into account the APR and the interest rate, small business owners can determine what loans will work best for their situation.

How is APR calculated?

Since the Truth in Lending Act (TILA) came into effect in 1968, lenders have been required by federal law to conspicuously disclose the APR, term, and total costs of a loan to a borrower. Because of this, anyone with a calculator and the formula can determine their APR independently.

Calculating the basic APR of a loan is a two-step process that can be done by hand in a pinch or on a spreadsheet.

  • Calculate the monthly payment

    • Monthly payment = Rate * # of periods * (present value + additional costs and fees)
  • Using that monthly payment answer, calculate the APR.

    • APR = (# of periods * monthly payment * present value) * 12

If the idea of doing even more math is off-putting, there are plenty of online APR calculators that can be used in place of the old-fashioned way.

What now?

While the APR is incredibly important in determining which loan is right for a small business, other factors should also come into play.

Finding a trustworthy and transparent lender is just as important as finding the APR that gets the best loan for a small business owner. At Strategic Capital, transparency, innovation, and expertise are at the core of everything we give to our clients. If you’re ready to be a part of the thriving small business community, come grow with Strategic Capital.

Ryan, Ridgway, Co-Founder and Managing Partner

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