The effective interest rate is calculated as if compounded annually. If we convert 5% per month and $ 10 fees per month into annual interest rate, it will be annual percentage rate.
APR AND EAR PRACTICE PROBLEMS PLUS
This simple annual interest rate will be APR.Ī bank issued loan of $ 100 for 6 months at 5% per month plus $10 fees per month. In EAR, we have to pay service charges, late fee and origination fees.Ī bank issued loan of $ 100 for 7 months with simple annual interest of 15%. After this, we also need to add different fees in calculated compound interest rate.īecause in APR, we do not add different fees, so, it is just nominal cost of borrowing which we have to pay in simple annual interest after calculation of APR. But for calculating EAR, we need to calculate compound interest rate. For this, we need total interest payment, principal amount and time in years. But there are following differences between APR and EAR.ĪPR is calculated by using simple interest rate formula.
APR AND EAR PRACTICE PROBLEMS FULL
Full form of APR is annual percentage rate and EAR is effective annual percentage rate. APR and EAR are both annual interest rate which is used for calculation of annual interest on a loan.
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