andieje

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# Calculating APR - effect of an upfront fee

Hello

I'm looking at this online apr calculator and I'm a bit confused as to why adding an upfront fee to a loan increases the apr so much

http://www.financecalcs.co.uk/smartcalcs/LoanCalculatorquote.php

For example, if i add a fee of £250 to a 10k loan over at 5% interest over a year the apr changes from 9.5%, the apr changes to 14% give or take depending on whether the fee is upfront or spread. I dont understand why this is so much higher than if i simply borrowed 10250 (where the apr stays at 9.5%). I know that doing this approximation isn't quite the same as having an upfront fee because an upfront fee would affect the value of the first monthly payment whereas all the payments are the same in my quick workaround , but even so i wouldnt expect this. In fact i would expect an upfront fee which is paid off in the first month and hence accrues hardly any interest would have negligible affect on APR?

Thanks in advance for any light you can shed

I'm looking at this online apr calculator and I'm a bit confused as to why adding an upfront fee to a loan increases the apr so much

http://www.financecalcs.co.uk/smartcalcs/LoanCalculatorquote.php

For example, if i add a fee of £250 to a 10k loan over at 5% interest over a year the apr changes from 9.5%, the apr changes to 14% give or take depending on whether the fee is upfront or spread. I dont understand why this is so much higher than if i simply borrowed 10250 (where the apr stays at 9.5%). I know that doing this approximation isn't quite the same as having an upfront fee because an upfront fee would affect the value of the first monthly payment whereas all the payments are the same in my quick workaround , but even so i wouldnt expect this. In fact i would expect an upfront fee which is paid off in the first month and hence accrues hardly any interest would have negligible affect on APR?

Thanks in advance for any light you can shed

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ASKER

Brilliant explanation - thank you

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