# What Is a Per Annum Interest Rate?

Comparing interest rates can pose a challenge.

The per annum interest rate is the interest rate cost over a one-year period assuming that the interest is compounded annually. For example, a 5 percent per annum interest rate on a \$10,000 loan would cost \$500. Another way of viewing this concept is that a per annum interest rate is applied only to the loan principal. Expressing interest rates in this manner makes it convenient to compare various kinds of interest rates offered from multiple sources when shopping for a loan.

## Types

Loans are marketed with interest rates that are measured in two basic forms--annual or compound. The annual interest rate, also referred to as a simple interest rate, is the same as the per annum interest rate described above. Compound interest rates are rates that are compounded more than once per year. For example, the compounding could be done daily, monthly, quarterly or for any other time period that is less than one year. Another way of viewing this concept is that a compound interest rate is applied to the loan principal as well as the cumulated loan interest. Consequently, the per annum rate is always higher than a compounded rate.

## Example

For example, a 5 percent interest rate compounded monthly is equal to a 5.116 percent per annum rate. A 5 percent interest rate compounded daily equals a 5.1267 percent per annum rate.

## Loan Sources

Interest rates are a competitive consumer good. Banks and other lending institutions change interest rates frequently based on the supply and demand for loans in the markets they serve.

## Factors Considered

In determining the interest rate to charge, lending institutions usually assess borrower creditworthiness. This includes such factors as the borrower's credit score, employment status, income level and age. Interest rates can also be affected by the specific terms of the loan agreement. These include the following factors: (a) the length of the loan, that is, the time period in which the loan principal must be completely paid, (b) whether the interest rate is fixed or variable over the loan period, (c) the amount of the loan relative to the market value of the product being financed, that is, the loan-to-value ratio, and (d) whether the loan contract includes upfront costs such as loan processing fees.

## Importance

Where do you get the best interest rates? Like most consumer goods, you must shop the market to find alternative loan packages. The best place to start, however, is to compare the per annum interest rates from various lenders.

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