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Inside Waddle

Don’t get bamboozled by business loan pricing

What exactly is an “Annualised Percentage Rate” (APR)?

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Business loans can be tricky, especially when quoted interest rates don’t include all the fees and charges.

When you’re shopping for a new business loan online it’s very easy to get bamboozled by all the terms lenders use like APR, RR, PA, PM etc. The most important one to look at is the APR.

What exactly is an “Annualised Percentage Rate” (ARP)?

When you jump online and start searching you will definitely want to take a closer look at the APR you’re quoted and if you’re not being quoted one you should take the time to add it up. APR matters because it’s the only number that really tells you what you’re going to pay over the life of term of the loan.

The annual percentage rate on a business loan is the price you pay for borrowing money. It includes the annual interest rate plus any included fees, upfront costs, exit fees etc. Say you’re quoted an annual interest rate of 12% at two different lenders, but in addition to the interest rate, one lender’s fees amount to an additional 3% and the other lender’s fees amount to 4.5%. If all a lender had to disclose to you was the interest rate, you’d think both loan products were identical.

That’s why it’s very important to understand the APR. It shows you the variances in the cost of borrowing money from lender to lender and product to product. For instance, at the first lender, the combined cost to you would be 18%, and at the second lender the combined cost would be 19.5%. The more money you borrow, the more that 1.5% difference will cost you.

By combining fees and interest, APR helps you make an accurate comparison. You should ask the lender or take note of all the fees and charges over the loan terms and add them up to make a comparison to another loan product or lender including the loan term.

Are there sneaky catches to lender loan terms?

Lenders are always trying to compete for your business and they are constantly coming up with new ways to make products seem more attractive to potential borrowers. It should be a priority to ensure you’re doing a quick APR calculation to make sure you’re getting the best deal.

There are a few more points to keep in mind about APR

With variable interest rate products, you might be quoted an average APR. Although the average might seem helpful, in theory, it’s a lot less useful in practice.

A loan could have a 4% introductory APR that jumps to 6% after two years. What that will cost you in the end depends on how quickly you are able to repay the loan.

Another catch to look for is when a lender quotes an annual interest rate of say 15% however, the loan term is only nine (9) months or even six (6) months. A quick calculation on a 6-month terms quickly doubles the per annum cost. So while the 15% might be attractive at first glance, a savvy business owner will spot the real cost pretty easily.

APR’s can get tricky and you can also calculate true APR’s when you’re repaying fixed term loans with principal and interest. You see the trick here is the interest payments on the principal always remains the same down to the last repayments even though you’ve paid off all the principal. Sometimes you may have even repaid the principal in the first 6 months and are simply repaying interest for the remaining term of the loan at the same rate as day one. Now that’s an APR calculation that’ll reveal a real hidden cost.

If you were using a line of credit product you only pay interest on the principal you have outstanding, making a line of credit favorable over a fixed term loan if you’re using the funds for ongoing working capital as fixed term loans are generally better suited to asset purchase like equipment.

While “APR” is pretty cut and dry, how it gets used by various lenders to make a financial product more appealing may not be so simple.

Got a different view? Let us know below…


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Waddle regularly shares client growth stories, thoughts on Fintech, lending, company culture, product strategy and design.