The Annual Percentage Rate or APR is the interest charged for borrowing that represents the actual and effective cost of the loan expressed as a percentage, since all the costs associated with taking out the loan are considered. We explain how it is calculated.

If you want to compare mortgages or any type of loan, it is essential to know what the Annual Percentage Rate or APR is. In Spain, this indicator must appear in the advertising and documentation of financial products that refer to a loan. This will help you compare the real cost of two or more loans over a specific term.

The several lending options that you can find on the financial products market have two interest rates associated with them, the NIR and the APR, both of which financial institutions are legally obliged to inform customers about before they give out a loan. Although they are closely related, there are important differences that must be known to know the effective cost of a loan.

Differences between the NIR and the APR

The NIR or Nominal Interest Rate is a fixed percentage that the bank establishes for the provision of money and which represents the sum of the Euribor plus the differential applied. In other words, it is the amount to be paid to the financial institution in exchange for the capital loaned. This cost can vary depending on the amount of the loan, the repayment period and our economic profile. However, the NIR does not include the costs associated with the mortgage and, unlike the APR, it does not have to be calculated annually.

The APR takes into account all the costs associated with taking out the loan, so it includes the NIR and any fees related to the loan, such as the arrangement fee, the transaction costs borne by the consumer and the frequency of payments. However, we should keep in mind that the APR does not include the cost of some concepts, such as notary fees or insurance premiums and other products linked to the transaction.

It is also important to remember that in the case of variable interest rate loans, it is not possible to determine their future evolution, so the calculation of the APR is just indicative. In any case, it is the most reliable indicator when it comes to determining the real cost of a loan, beyond the commercial technique behind the APR announced in the headlines of the offers and promotions presented by financial institutions.

How to calculate the APR

The APR interest rate is calculated using a mathematical formula (APR = (1 + NIR/f)f – 1) that takes into account four factors: the amount of the loan; the NIR; the repayment terms; and all the costs related to the loan. You can use one of the APR calculators on the Internet, such as this one from the OCU, or enter the data in the mortgage or personal loan simulator offered on the Bank of Spain’s website.

Remember that before carrying out any simulation, it is necessary to have these data to obtain the most realistic percentage possible: initial capital, NIR, constitution and periodic mortgage costs, notary, agency and land registry fees. The periodicity of the repayment, i.e., if you are going to pay monthly, quarterly, etc. As well as the repayment period of the mortgage.

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