How does APR work on a loan?
In: 3
The “annual percentage rate” is *roughly* how much extra you’d owe if you made zero repayments for a year. Of course, that never happens, because the loan agreement will have you agreeing to make regular payments.
Instead, the bank’s computer turns the *annual* interest rate into a *daily* interest rate by dividing by 365 (or 366). Then, each day, they look at the balance, and tally up the interest you owe on the balance that day. After (say) a month, they charge your loan account the accumulated interest.
For example, suppose your loan was at 7.3% APR. That’s a daily rate of 0.02%. If you owed $10000, the bank would be noting every day that you owe them an extra $2, though they probably don’t actually *charge* you that until the end of the month.
If you paid $1000 on day 15, then your balance is $9000, so now you only owe an extra $1.80 per day. On day 30 they debit your loan account the accumulated interest: 15 x $2 + 15 x $1.80 = $57. Now your balance owing is $9057.
Fees are not counted in the APR, though some countries force banks to publish a “comparison rate”, which is the “effective” APR including all the fees, for a “typical” mortgage.
Latest Answers