I am trying to better understand different types of interest rates. However, I am having difficulties complete, consistent and pedagogically-efficient explanations online. Thus, I have decided to design and program a couple of scripts. I find that programming can be a powerful bridge to truly understand tricky concepts.
The first concept I am trying to understand is the so-called annualized percentage rate (APR). Common explanations basically mention this one as an interest rate that somehow accounts for the costs of the loan...
- The name is very misguiding... right?
- Does it have to be annualized if and only if the given rate is not quoted per annum?
- Also, is it computing using the real interest rate, rather than a nominal interest rate?
- How is the APR used in practice by loan providers? Do they establish a nominal rate that makes sense to them, add the fees and then compute the "APR" to then use it to compute interest payments?
Does the following piece of code make sense? In this piece of code, I use the term "cost-of-borrowing interest rate" to refer to the "APR":
inflation_rate_per_year // Annual inflation rate. nominal_interest_rate_per_year // Nominal interest rate per year. real_interest_rate_per_year // Inf-adj inf. rate per year. cost_borrow_interest_rate_per_year // Cost-of-borrowing int. rate. principal_money // Amount being loaned. total_fees_money // Total to be payed in fees. total_cost_loan_money_per_year // Total cost of loan per year. total_owned_money // Total to pay back. // Given: inflation_rate_per_year, nominal_interest_rate_per_year // Given: principal_money, total_fees_money // Compute real interest rate and percentage. real_interest_rate_per_year = nominal_interest_rate_per_year - inflation_rate_per_year // Compute cost-of-borrowing interest rate and percentage. cost_borrow_interest_rate_per_year = (total_fees_money + principal_money)/principal_money* real_interest_rate_per_year // Compute appreciation on principal. total_cost_loan_money_per_year = principal_money*((1 + cost_borrow_interest_rate_per_year) - 1) total_owned_money = principal_money*(1 + cost_borrow_interest_rate_per_year)
Why do I mean by "making sense"? Well, is it OK, considering the given interest rates assume the borrowing period to be 1 year? If it were not a year... Should I have to add the annualization factor of
n equaling the number of days in the borrowing period.
I understand the question is posed a little vaguely. I basically want to better understand the APR via this script :)