Annual percentage rate (APR)

Definition

The annual percentage rate (APR) is a standardised way of expressing the overall cost of borrowing, including both the interest rate and certain fees, as a single percentage. It’s designed to provide borrowers with a clearer understanding of the true cost of a loan or credit product.

What is the annual percentage rate?

The APR takes into account not only the interest rate charged on the borrowed amount but also any additional costs such as origination fees, points, and certain other finance charges. By including these costs, the APR gives borrowers a more accurate representation of what they’ll actually pay over the life of the loan or credit agreement.

Lenders are typically required to disclose the APR to borrowers when offering loans or credit, allowing borrowers to compare different offers more easily and make informed decisions about their borrowing options. Keep in mind that while the APR provides a helpful comparison tool, it may not cover all potential costs, so it’s important to carefully review all terms and conditions before committing to a loan or credit product.

Example of annual percentage rate

  1. Car loan details:
    • Alex is in the market for a new car and decides to finance the purchase with a loan. He borrows R20,000 from a bank to be repaid over 5 years.
  2. Nominal interest rate:
    • The bank offers Alex a nominal interest rate of 5% per year on the loan.
  3. Additional fees:
    • In addition to the interest rate, there are some upfront fees associated with the loan, such as an origination fee and processing fees. These fees amount to R500.
  4. Calculation of APR:
    • The APR is calculated by considering both the interest rate and the additional fees. In this case:
      APR = 5% + (R500 / R20,000) Ă— 100%

    The APR, in this case, is 7.5%. It provides a more comprehensive view of the total cost of the loan, including both interest and fees.

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Disclaimer: Swoop Finance helps South African firms access business finance, working directly with businesses and their trusted advisors. We are a credit broker and do not provide loans or other finance products ourselves. We can introduce you to a panel of lenders, equity funds and grant agencies. Whichever lender you choose we may receive commission from them (either a fixed fee of fixed % of the amount you receive) and different lenders pay different rates. For certain lenders, we do have influence over the interest rate, and this can impact the amount you pay under the agreement. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Swoop Finance can introduce applicants to a number of providers based on the applicants’ circumstances and creditworthiness. Swoop Finance (Pty) Ltd is registered with CIPC in South Africa (company number 2023/820661/07, registered address 21 Dreyer Street, Cape Town, South Africa, 7708).

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