In order to be able to compare loans thoroughly and objectively, you would have to be able to calculate Annual Percentage Rate or APR. Before we get started, we need to know what are the cost factors that should be calculated when you are calculating APR. Aside from interest, we would have to determine the right amount of principal paid as well as other costs involved.
Let’s use an example to make this calculation a lot easier to understand. A loan is being advertised with an interest rate of 7.5% per annum and the total cost (that is the entire costs that might be charged throughout the loan period) is £5,000. If you are borrowing £200,000 with 10 years of loan period, you will find yourself with monthly payments of £2,375.
With the monthly payment in mind, you can quickly figure out that the total amount of payments you will be making after 10 years is actually £285,000; the total amount of interest is £85,000 over the course of 10 years.
Those numbers we’ve been talking about are basics of calculating APR. With all the data in hand, you can continue with calculating the APR and finding out just how much the loan costs actually.