What is Annual Percentage Rate (APR)? My lecturer in finance used to say:
– APR is ‘the kilo-price of borrowing money’. It’s just the same as the kilo-price you pay for apples you buy in the supermarket. It’s a measure that allows people to compare loan products including interest, all fees etc. – as opposed to only comparing the nominal interest which is insufficient and gives a skewed picture.
APR is an important tool for comparison purposes, but it should be used with respect. What APR can do is to compare the rates from one loan provider to another; how the rates vary over time; how they vary from country to country in a specific region and so on, always keeping in mind which exogenous factors might be the reason why some APRs have to be higher than others, such as financial instability in a country. Of course the cost of borrowing (the APR) will be higher in Malawi where its Kwacha currency was recently devalued by about 50% than it will be in the Euro-zone. It’s risk vs. rates, as in any other investment situation.
So let’s have a look at the realised MYC4 APR for the last couple of years:
What’s shown in the chart above is a small dot for every loan on MYC4 for the last 3 years based on loan size. As you can see, most loans have had an APR of 40-65%. Now, what can we compare this to? We can compare it to any other microfinance institution in the same area at the same time. For that purpose we have the organisation MF Transparency which collects data on APR. Here’s their data for Kenya for instance. Please, feel free to compare with MYC4 and post a comment with your findings. Also, below you can see the APR over time for the countries MYC4 has (and have had) operations in:
But understand one immensely important point: APR should not be used to compare different financial products in different financial markets. Comparing the APR on your Danish mortgage loan with a small business loan in Uganda is nonsense. It’s not what the APR should be used for. You can compare APR within a sector/country/loan product/period of time, but that’s about it. You wouldn’t compare the kilo-price on bananas and apples and demand it’ll be the same either, would you? You wouldn’t demand that a banana should cost exactly the same in every country either, right?
For more details on APR, see the blogpost Highlighting APR by MYC4 Credit Operations Manager, Titus Kuria.