The Annual Percentage Rate (APR) is a critical financial metric that represents the total cost of a loan facility. It includes not only the interest rate charged by the lender but also all fees and other charges. Therefore, businesses must pay close attention to the APR when assessing the affordability of a loan. It is recommended to ask for both the interest rate and APR when considering a loan from a lender.
Lenders often add fees and other charges to the loan facility, which increases the APR. These fees include success fees, marketing fees, and syndicate fees, among others. While interest rates remain static throughout the loan repayment period, the APR changes over time and will likely increase if additional fees are added.
To illustrate the impact of APR on a loan facility, consider a hypothetical example. Suppose a business seeks to borrow a 100,000 interest-only loan for two years with an interest rate of 7%. Without any fees or other charges, the total repayment would be 114,000. However, including a 2% arrangement fee, the total repayments increase to 116,000. The cost of the loan facility over two years is, therefore, 16,000 (8k per year), making the APR 8%, not 7%.
In conclusion, businesses must carefully evaluate the APR of a loan facility to make informed borrowing decisions. By considering the APR, they can accurately calculate the total cost of the loan and plan for repayment. It is recommended to consult with reputable lenders, who can help provide clarity on the true cost of a loan.
At Funding Bay, we work with a plethora of credible lenders. Get in touch with us to explore commercial finance solutions for your business.
