How do I Choose the Best APR Calculator?

Unlike a simple interest loan calculator, an APR, or annual percentage rate, calculator will take into account additional variables that yield the effective interest rate of a loan. This effective rate can be affected particularly by fees associated with the loan, so the best APR calculator will allow for fees to be added into the calculation. The more variables accommodated by the calculator, the better choice it is.

In choosing the best APR calculator, it is important to understand what the annual percentage rate is and why it can differ from the stated interest rate on a loan. A simple interest loan calculator, typically features four variables, loan amount, interest rate, number of payments and payment amount. With three of the four variables filled in, the calculator will determine the fourth.

Most loans, however, have fees associated with them. This means the total amount paid by the borrower is actually greater than the stated principal amount on the loan. These additional costs make the effective interest rate of the loan higher than the stated rate.

A typical APR calculator will have the four variables mentioned above and allow at least one additional variable, but the additional costs often added to loan can come from many sources. So the best APR calculator will ask for such variables as points, fees, mortgage interest insurance and prepaid interest. By having input windows for these variables, the borrower is more likely to include all fees in the calculation.

Points, or discount points, cover an amount usually expressed as a percentage of the loan amount, that the lender requires to close the loan. This upfront payment allows lenders to offer a lower interest rate. At the same time, the upfront payment increases the borrower’s total outlay and the effective interest rate and should be accounted for by an APR calculator.

In addition to discount points, most loans have a variety of closing costs as well. These costs can be as much as 4 percent of the loan amount. Closing costs often include legal fees, title transfer fees, fees for recording the sale with local governments, among many others.

If the amount borrowed exceeds 80 percent of the home’s current value, lenders normally require private mortgage insurance. PMI increases the monthly payments by the amount of the insurance premium until the principal on the loan drops below 80 percent of the home’s current value. The variety of fees possible with a loan can greatly affect the annual percentage rate, so the best APR calculator will prompt the potential borrower to input the widest variety of possible additional costs.