How to calculate APR and why it's important

The annualised or annual percentage rate can be explained as the cost of borrowing money on a loan or credit card calculated over a year. It’s always expressed as a percentage.

APR allows you to easily compare between lenders and products before you apply. The lower the APR, the lower the borrowing cost. So a small difference in APR can have a big impact over the life of a loan.

APR is different to monthly flat rate, which is used to work out the repayment amount in personal loan products. Here’s how the monthly flat rate is used:

APR on the other hand is the total cost, including interest and other related fees and charges. This gives you a better idea of the true cost of borrowing than the monthly flat rate, which only reflects the interest.

APR is calculated over a full year and includes interest and all related fees, such as handling and service charges. Some loans, such as the HSBC Personal Instalment Loan, don't charge you any handling fee.

Lenders are required by the Hong Kong Monetary Authority and the Hong Kong Association of Banks to use the same 'Net Present Value' method for calculating APR. This makes it easier to compare different charging structures.

Meanwhile, the Code of Banking Practice states that banks should show APRs when advertising and promoting personal loans and credit cards. They should also answer your queries and reveal how they determined the interest rate for your application.

Use our APR calculator

The current legal limit for APRs in Hong Kong is 48% unless justified by exceptional monetary conditions. According to the Code of Banking Practice, banks should not charge extortionate interest rates and must provide a convincing reason if they do. The current level presumed to be extortionate under the Money Lenders Ordinance is 36%.

While APR gives you a comprehensive overview of the costs associated with borrowing, some charges may not be stated. For instance, APR doesn’t include late payment fees, early repayment penalties, and other charges if you don't stick to your loan terms.

APR is a useful tool to quickly compare interest rates for personal loans and credit cards. But it won't necessarily match what a loan or card costs you. That depends on your credit score, the final rate you’re offered, how you use the product, and how much you repay each month.

APR can vary widely among lenders, so it’s good to shop around to find the most cost-effective rate. Remember, a lower APR means lower borrowing costs.

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