The APR is used as a comparison factor between two or more different loans. One may say that the APR has a similar function to when supermarkets state the price per kilogram or per litre of goods, making it easier to compare the prices of different products.
The APR includes all the costs associated with the loan. These may include, for example, establishment costs, various loan fees, interest, and other expenses related to the loan. In general, the APR becomes larger when the loan term is shorter. This is because the costs of the loan must be “distributed” over a shorter period. Therefore, the costs of the loan will “account for more” in the APR.
The APR is difficult to calculate. In many cases it will only be an approximate value, since interest in banks is often calculated quarterly while the payments are monthly. In such cases, a computer normally performs the calculation.
Other loans are calculated with monthly interest and monthly payments. In these cases, we can calculate the APR with greater precision. However, it is still only an approximate value.