What is APR and will it make loans cheaper?
- There are various costs associated with a loan. These costs range from bank fees and charges to third party costs, such as legal fees, insurance, and government levies.
- When taking up a loan, a borrower often focuses on the bank interest rate; however, this is just one of the loan cost components. Therefore, to better determine the total cost, a formula should be used to compute the various elements into a numeric representation (a percentage rate). When this percentage rate is based on a r a 12 month period, it is called the Annual Percentage Rate (APR).
- In most countries APR is mandated by law. But in Kenya, the banking industry has proactively adopted the APR model in conjunction with the Central Bank of Kenya’s requirement that banks provide customers with the Total Cost of Credit (TCC) and Loan Repayment Schedule.
- With the APR and TCC disclosures, customers will be empowered to shop around for the loan products that meet their needs.
- The enhanced transparency will therefore stimulate competition within the banking industry thus contributing to more competitive interest rates for customers with a good credit track record.