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What is APR? and How to Calculate how much Interest you pay on the basis of APR

When you see "APR" on credit, loans, and some purchase options, it's worth knowing that APR means "Annual Payment Rate". You can use the percent figure to work out how much you will pay if you are going to be paying credit interest at that rate.

Supposing you're buying something for 300.00 on credit and the signs say 25% APR. You may know that 25% is a quarter, which means that the Annual Payment Rate is a quarter of the total. In other words, if you borrow 300.00 for one year at 25%, then you'll pay a quarter of 300.00 as interest, which is 75.00. Of course you'll have to pay the original 300.00 as well, so that makes a total payment of 375.00 if it's all paid by one year after the initial purchase.

Sometimes the APR is some unusual figure like 22.5% APR. For example "Buy this exciting carpet for £499 with only 22.5% APR!". Well, leaving aside the question of whether the carpet really is "exciting" and whether "only" is appropriate considering the price, here's how to work out how much it will really cost...

Interest = 499 x 22.5/100

That works out at 112.28 interest, but that's on top of the initial 499, making a total of 499+112.28 = 611.28

You can do calculations like this yourself. It's easy because the % APR is the "annual payment rate" which is a percent of the total amount that has to be paid as interest. By the government legally enforcing credit statements to have to be declared as APR, it avoids the dangerous confusion created by such things as "Pay only 3% interest per month!". A loan rate of 3% per month is 42.6% APR, as explained at the page about percent. The difficulty is not just that the term is deceptive, but in the relative difficulty of calculation. Most people are clever enough to use a basic calculator to work out how much interest they'll pay based on APR. However, if the interest were to be quoted "per week", the calculation is much more advanced. If it was say "Borrow money from Loansharks Loan Company! Pay only 1% per week!", you should beware. 1% per week is 1.01 raised to the power 52, to get it into a "per year" basis, which is 67.7% APR. That calculation is less easy, and not everyone can use a scientific calculator.

PayDay loans are the worst for the APR, and I have heard that some of them are over two thousand percent APR. So, beware!

When buying expensive items, it's best to pay in cash, or in the online equivalent which is to use a debit card. That way, you are paying with money which you have already got. In contrast, if you borrow money, you'll have to pay it back and pay interest in addition. But at least you can calculate how much the interest will cost per year. You just multiply the price by the APR and divide by 100.

If you buy things on credit, make sure you understand the APR. You can compare APRs with each-other and shop around for good deals.

How much is a "good" APR? It is a matter of personal opinion, but I would say that 10% APR is moderate, 20% APR is getting towards being expensive, and 40% APR is frighteningly high.

If a company ever says "Typical APR 0%", then it means that they are offering to lend you the money and they'll charge no interest. However you will be expected to pay the amount borrowed back. Also, read contract smallprint and make sure there aren't any hidden nasty "catches".

I hope this page is some help.

This is a page at Zyra's website, which is worth coming back to and exploring.