APR, or Annual Percentage Rate, is a representation of the true cost of your loan. It includes the amount of interest you'd pay any finance charges associated with your loan, expressed as an annual rate.
APR is not the same as interest rate, and it gives a much more accurate view of your loan cost. Small business lenders can keep the interest rate the same, but 10x the APR by manipulating the origination fee and loan term.
Let's say you borrow $10,000, and agree to pay back 110 percent at the end of one year. Your interest rate is a flat 10 percent.
However, if you add a $500 origination fee, your interest rate is still a flat 10 percent, but your APR is now 15.5 percent.
The real trick with APR, though, is (1) the term of the loan and (2) the payment frequency.
The shorter the term, the higher the APR. For instance, on that same example above (10% interest with a $500 origination fee), the APR jumps to 20.50 percent if you cut the term to only 6 months.
Similarly, the more frequently you make payments, the higher the APR goes. For instance, if you take the same example, but make payments monthly, that hikes the APR to 28.56 percent. If you make payments weekly, the APR jumps up again, this time to 31.03 percent.
Too Many Small Business Loans Are Not Transparent
Confused? You're not alone.
Many small business owners have no idea what they're actually paying for their loans, and cash advance companies and short-term lenders use these simple tricks to hide the true APR of a loan.
According to Forbes financial contributor Laura Shin, "Not only do small business lenders often not disclose the range of APRs on their site, but also when asked directly about their APRs, many either tried to dodge the question, or gave a range lower than what I calculated from sample loans described on their site."
All too often, lenders hide the true costs of their short-term loans by quoting simple interest rates and adding stiff fees.
As a response to the proliferating problems with excessive loan costs, a number of responsible small business lenders have joined together to create the Small Business Borrowers' Bill of Rights. This document is essential reading if you're considering taking out a business loan. Able is one of the signatories of this Bill of Rights, because it's important to us that all borrowers are treated fairly.
There's a use case for every financial product, even short-term merchant cash advances. But before deciding on any financial product, you need to be aware of its true cost.
Plug your figures into Able's True Rate APR Calculator, and empower yourself with accurate knowledge of your bottom line.