Two lenders offer you a loan. One quotes 12%, the other 12.5%. The 12% loan looks cheaper, but it may not be once fees are added. That is why RBI requires lenders to show the APR, or Annual Percentage Rate. This guide explains what APR means, how it differs from the interest rate, and how to use it, with worked examples.
What is APR on a loan?
RBI defines APR as the annual cost of credit to the borrower, including the interest rate and all other charges. Under RBI's Key Facts Statement (KFS) rules:
- APR includes all charges the lender levies, such as processing fees.
- Charges the lender collects on behalf of others, such as insurance and legal charges, are also part of the APR and must be shown separately.
- The KFS must include an APR computation sheet and a repayment schedule.
These rules cover retail and MSME term loans sanctioned on or after 1 October 2024 by banks, co-operative banks and NBFCs, including housing finance companies. Credit cards are exempt. RBI first issued these rules in April 2024; RBI has since folded many older circulars into consolidated directions (November 2025), so check the latest directions.
Why is APR higher than the interest rate?
The interest rate only tells you what you pay on the loan amount. But fees are often taken out upfront. So you receive less money, yet repay EMIs (equated monthly instalments) on the full loan. Paying the same EMIs for less money in hand means a higher real cost. APR captures that.
If a loan has no fees or charges at all, its APR equals its interest rate.
How is APR worked out?
In simple words, APR is the yearly rate at which the money you actually receive equals the value of all the EMIs you will pay. In our examples, we find that monthly rate and multiply it by 12, the same way loan rates are usually quoted. A lender's method may differ slightly. The APR in your KFS, with its computation sheet, is the figure that counts.
The EMI itself uses the standard formula: EMI = P × r × (1 + r)^n ÷ [(1 + r)^n − 1]. Here P is the loan amount, r is the monthly rate (yearly rate ÷ 12 ÷ 100) and n is the number of months.
Worked example: a personal loan at 12%
- Loan: ₹5,00,000 at 12% a year for 36 months
- EMI: ₹16,607
- Processing fee: ₹11,800 (including GST), deducted upfront
- Insurance premium collected by the lender: ₹8,000, deducted upfront
- Money you actually receive: ₹4,80,200
| What is included | Rate |
|---|---|
| Interest rate only | 12.00% |
| Interest + processing fee | about 13.67% |
| Interest + processing fee + insurance (APR) | about 14.83% |
The headline rate is 12%, but the loan really costs about 14.8% a year. Now say another lender quotes 12.5% for the same ₹5,00,000 and 36 months, with a ₹2,000 fee and no insurance. Its EMI is ₹16,727 and its APR is about 12.78%. Despite the higher headline rate, it is the cheaper loan. Compare APRs, not rates.
Why does a shorter loan have a higher APR?
A fixed fee is spread over fewer months on a short loan, so it weighs more. Here is the same ₹5,00,000 at 12% with the same ₹11,800 fee, over different tenures:
| Tenure | EMI | APR (fee only) |
|---|---|---|
| 12 months | ₹44,424 | about 16.56% |
| 36 months | ₹16,607 | about 13.67% |
| 60 months | ₹11,122 | about 13.06% |
This does not mean longer loans are cheaper. The 60-month loan has a lower APR but costs far more in total interest (about ₹1,67,333, against about ₹97,858 for 36 months). APR compares the yearly cost of offers for the same amount and tenure. Use it that way.
Worked example: a home loan with fees vs one without
You need ₹30,00,000 for 20 years (240 months). Two offers:
| Offer A | Offer B | |
|---|---|---|
| Interest rate | 8.40% | 8.55% |
| Upfront fees | ₹30,000 | Nil |
| EMI | ₹25,845 | ₹26,130 |
| APR over 20 years | about 8.54% | 8.55% |
| Real yearly cost if closed after 3 years | about 8.79% | 8.55% |
If you keep the loan for the full 20 years, Offer A costs a little less. You would pay about ₹62,32,832 in all (fees plus EMIs), against about ₹62,71,131 for Offer B. That is a gap of about ₹38,300.
But some borrowers prepay or switch lenders well before 20 years. If you close the loan after 3 years, your total outgo (fees, 36 EMIs and the balance to close) is about ₹37,62,835 with Offer A and about ₹37,46,328 with Offer B. Offer B is cheaper by about ₹16,508.
The lesson: upfront fees matter more the sooner you expect to close or switch the loan. An APR worked out over the full tenure assumes you keep the loan that long.
What does APR not tell you?
- Future rate changes. For a floating-rate loan, the APR uses today's rate. If the benchmark, such as RBI's repo rate, changes, your real cost changes too.
- Late payment costs. The APR is worked out on the repayment schedule. Penal charges for late payment are disclosed separately in the KFS and loan agreement, under RBI's penal charges rules (first issued in August 2023; check the latest directions).
- Prepayment. As the home loan example shows, an APR worked out over the full tenure does not show the cost of closing early.
- Extra features. Some loans offer things like an overdraft facility. Weigh those separately.
How should you use APR to compare loans?
- Ask each lender for a KFS for the same amount and tenure. Each KFS must stay valid for at least 3 working days for loans of 7 days or more.
- Check that insurance and other third-party charges are shown separately and included in the APR.
- Compare APRs. Then think about how long you will really keep the loan.
- Remember that fees or charges not in the KFS cannot be charged later without your explicit consent.
Do it in 10 minutes, free
Enter two offers, with their rates and fees, in the LowerMyEMI compare offers calculator. It shows which costs less, and you can export the result to Excel or PDF.
Already paying a loan? LowerMyEMI can write a ready letter asking your bank for a lower rate, and one email per lender asking for their offer with a KFS. You send them from your own email. We are not a lender and never promise a rate; lenders decide.