The cost to borrow money. It is the yearly generated by the interest charged on the amount loaned.
APR is absent any compounding effects.
The formula is simply to divide the sum total of the interest by the amount of the loan or investment.
APR applies to:
- credit cards
- mortgages
- car loans
- student loans
The rate is applied on a yearly basis which can then be divided into quarterly or monthly segments. It is charged to borrowers.
Investing
APR is an important metric for investors, especially those utilizing fixed income instruments. There are assets falling into this category with the most common being bonds.
Here there is a consistent return called a yield. It is a flat percentage the instrument pays each year. For example, a $10,000 bond with a payment of $200 is said to have a coupon of 2%. This is the APR on that asset. The yield will fluctuate as the price on the market moves since the payout is fixed.
Those holding to maturity know exactly what they are receiving.
Investors who are not looking for fixed returns are also concerned about the APR. Wall Street money managers are always seeking to increase the return they provide clients. This is always expressed as a percentage, say 6%. This is considered the APR.
There are also benchmarks that those involved in the world of finance try to utilize. Warren Buffett set the hall-of-fame standard with his half century of 20% returns in the stock market. We also see indexes such as the S&P used to rate money and fund managers.