What is annual percentage rate (APR)?


What is APR? How do I calculate it? What is it compared to monthly interest rate? What are some of the terms I need to know to understand APR?

If monthly interest rate was 2% what would the APR be?

In: 1

You take out a loan for something like a car. That loan is for $100. The person that gave you that loan is taking a risk. They don’t know for sure that you’ll pay them back the 100 you borrowed. To account for this, they expect you to pay back the 100, plus a little extra.

The APR is that extra. It’s the amount of interest that you have to pay on the loan each year.

Let’s say your APR is 20%. If you took out a 100 dollar loan and didn’t pay it back at all, at the end of the year you would owe your original 100 dollars *plus 20%* to get you to 120 dollars.

Every year, the bank adds 20% of the remaining loan amount onto the loan. So if you had 50 bucks left at the end of the year, you would add an extra 10 bucks on to give you 60 total dollars left.

APR is the rate of interest you earn over a year. If you have $100 that earns 1% APR, you’ll earn about $1 in interest after a year. This can change whether or not the interest compounds or not. Compounding means that every time you earn interest, you’ll start earning interest on the new amount instead of the original $100, which can generate money pretty quickly if you happen to put in more than $100. The monthly rate is the APR divided by 12, so 1% split over 12 months = 0.083% per month. When taking out loans or applying for credit cards, the same is also true. Be careful to read the terms of the agreement so you don’t end up paying way more than you need to. As for terms, I can’t think of any off the top of my head apart from everything I just said, but YouTube has great resources. Investopedia is also amazing. It has almost everything you could want to learn about finances without a professor or homework.

Edit: if monthly interest rate is 2%, then APR would be 2% x 12 = 24%