When we are comparing loans and reviewing the previous example, we can clearly see that the monthly payment, calculated by considering £200,000 as the principal, is £2,375. However, the amount of payments you will be making is not really £2,375 since we haven’t really calculated the extra costs – can be charges, fees, closing costs, and other related charges – worth £5,000.
Using the APR calculator easily found online, you will be able to calculate the actual amount of monthly payments you will be making. In this case, the actual amount of monthly payments you will be making is £2,434, making the total amount of repayment now at £292,080 and the interest at £92,080. The extra £5,000 costs can actually make that much of a difference indeed.
Using the Newton-Raphson method to calculate APR of this loan, you will find that it is at 8.06% and not 7.5%. With smaller and shorter loan, a difference of 5% may not be much at all (although in this case it is a difference of no less than £7,000). Loans with longer term can actually have a difference of as much as 10% to 20%, and that is where calculating APR can really be very revealing.
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