“Per annum” is a Latin term that means annually or each year.
When it comes to contracts, per annum refers to recurring obligations or those that occur each year throughout an agreement. For example, if a bank charges an interest of 3% on a loan per annum, it means that you will need to pay an additional 3% of the principal amount every year until the end of the contract.
Uses of Per Annum
Here are other examples of how the term is used:
A monthly subscription to a magazine costs $10, so the subscription’s total cost per annum is $120.
The total amount of a home loan is $1 million and is payable in 10 years. Divide $1 million by 10 to get the amount you need to pay each year. In this case, it’s $100,000.
The maintenance cost per annum of a vehicle is $3,000. As the vehicle owner, you need to pay that amount throughout one year.
The monthly interest rate of the credit card is 1.5%. Multiply it by 12 months to get the interest rate per annum. In this case, it’s 18%.
When you lease office space for $10,000 for five years, you are expected to pay $10,000 annually, regardless of changes in the property’s value.
The per annum interest rate refers to the interest rate over a period of one year with the assumption that the interest is compounded every year. For instance, a 5% per annum interest rate on a loan worth $10,000 would cost $500.
A per annum interest rate can be applied only to a principal loan amount. The practice makes it more convenient to compare different interest rates from various sources when looking for a loan.
When it comes to savings and investments, the compound interest on $10,000 for three years at 6% per annum is $1,910.16. Below is a sample calculation to get the toal interest amount:
10,000 x .06 = 600 (first year)
10,000 + 600 = 10,600
10,600 x .06 = 636 (second year)
10,600 + 636 = 11,236
11,236 x .06 = 674.16 (third year)
11,236 + 674.16 = 11,910.16
11,910.16 – 10,000 = $1,910.16
Thank you for reading CFI’s guide to Per Annum. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: