Leading Entrepreneurship

Annual Percentage Rate, or APR, is one of those confusing numbers that we all deal with – to some extent – every day.  APR allows entrepreneurs to make a direct comparison between credit or investment opportunities.

APR = [1 + i/m]^m – 1.0, where i = interest rate and m = number of compounding periods per year

As an example, let’s assume you have a credit line offered by your bank, 9% interest, paid monthly:

APR = [1 + i/m]^m – 1.0
APR = [1 + 0.09/12]^12 – 1.0
APR = [1 + 0.0075]^12 – 1.0
APR = (1.0075)^12 – 1.0
APR = 1.094 – 1.0
APR = 9.4%

As you will notice the APR is typically higher than the stated rate. Of course, you need to be careful using only this number when making your decision, as it does not take into consideration any closing costs or other fees.