Aron Govil Understanding Annual Percentage Rates (APR)

What it is:

  • APR is essentially the cost you pay to borrow money. When you walk into a store and buy an item with a credit card, chances are you’re paying more for that item than if you put cash down on it. That additional amount of money is the APR that applies to your purchase. For example, if someone buys an MP3 player for $200 but pays 12 percent interest over 20 months, the buyer owes $240 at the end of two years because they are paying back both their initial purchase price plus also paying off their interest charges.
  • The distinction among easy hobby and compound hobby can both boom or lower your powerful fee of go back on funding relying on whether or not the compounding length is shorter or longer than your fee schedule.
  • Compound interest can make a huge difference in the effective return of an investment. For example, if you deposit $1,000 into a bank account that pays 5 percent compound interest annually, simple calculations show you’d have about $2,150 after 10 years.
  • Understanding Annual Percentage Rates (APR) is the first step to understanding what you are paying for. APR rates can be used as a comparison of costs between lenders, or as a cost-saving tool during your personal financial planning. APR rates vary depending on the lender and what purpose it will serve; however, all of them examine the identical thing: how an awful lot of debtors pay for cash over time.
  • A general APR price is described as “the hobby quantity charged according to yr expressed as a percent of the full borrowing.” This includes any fees that come along with obtaining credit and then repaying it, such as loan origination fees and penalty fees. These charges may raise your APR above an advertised low-interest rate, so make sure you understand what terms you are signing up for.

Here’s an example of how APR works: Aron Govil

If you get a credit card that charges 1% interest per month, its APR will be 12%. This means you’ll actually owe 1% interest in addition to the principle each month. The advertised monthly interest rate usually refers to simple interest, meaning only the principle is accruing interest at the indicated rate. To find out your credit card’s actual APR, divide 12 by 12 (months) and then multiply that number by 100 (to turn the decimal into a percentage). So, in this example it would equal .01 x 100 = 1%.

One cardinal rule when it comes to understanding APRs is that borrowing more money always costs more money. For example, if you pay off a loan over 3 years, your APR will be lower than if you pay it off in 1 year. The longer you borrow money for, the more interest is accrued.

Another rule to understand is when comparing APRs, make sure you are looking at comparable terms between lenders. If Company A has an advertised 10% APR but charges fees whereas Company B has an advertised 6%APR but does not charge fees, which one is really cheaper? Make sure to read all of the fine print before signing on the dotted line!

You may need to understand another acronym when dealing with loans- Numerical Value of Discount Points. This signifies how much less your lender would have changed if you’d paid any upfront fees they might have charged. For example, if you and your lender agree that a $10,000 loan will have two discount points; this means the true value of those points is $500 ($10,000 multiplied by .02). If you were to pay one point instead of two your effective interest rate would be decreased by 1%.

Remember as you take out loans throughout the year to be cognizant about what type of debt you are incurring and how much it actually costs over time. And for more information about understanding APRs, check out our other personal finance articles under Personal Finance Help or browse around! We’ve got all kinds of informative tips and tricks to help start saving and planning for your future today!

Conclusion:

Compound interest can make a huge difference in the effective return of an investment. For example, if you deposit $1,000 into a bank account that pays 5 percent compound interest annually, simple calculations show you’d have about $2,150 after 10 years.

Annual Percentage Rate should be understood well before taking loans says Aron Govil.