interest rate

[RAYZEE]

how does monthly interest rate equate to apr

[Oneeyedvic]

Short answer - it doesn't.

 

Working out the APR is a very complex mathematical formula. I work in the industry and it is pretty much all done by computers.

 

What is the monthyl figure, what are you borrowing, what are you paying back and over what period - i will endeavour to work this out for you at work tomorrow. (Also include any fees that are payable).

 

Peronsal advice though - don't look at APR, look at cost of borrowing - ie if you borroweed �25 off me for 2 weeks and I charged you �2, you may think that this is fair - it is an APR of around 400% though!

 

We run a scheme at work called credit 10 - if you bought something for �200, you would pay 11 monthly payments of �20 - total repayable is �220. This is an APR of 23.9%

[Hippy]

Annual Percentage Rate is the equivalent interest rate considering all the added cost to a given loan. The APR would equal the interest rate if there is no additional cost to a given loan. Here is a simple example where there is only one repayment after a year: Total money lent to you �1,000 Total extra cost � 25 Simple Interest rate 7.5% Term 1 year

 

The APR on this loan is worked out from the amount of interest you pay compared to the amount that you borrowed. They add the charges to the loan at the beginning so they actually lend you �1,025 on which interest is charged (7.5% of 1,025 = �76.88) So, you pay back �1,000 + �25 + �76.88 = �1,101.88 Of this �76.88 is interest so the APR is 76.88/1,000*100 (interest paid divided by loan amount with no charges as a percentage) = 7.688%

 

In reality you would borrow over more periods using compound interest.Banks typically calculate interest daily, so your repayment has an immediate reflection on the amount outstanding and therefore the interest they charge for the next period. So, if your repayments are monthly for that same loan above you would be paying a fixed monthly amount containing a varying mixture of capital and interest. Total loan at outset �1,025 Term 12 months Total interest paid �76.84 Monthly payment of �91.82 and the APR of that loan is 14.44% (source of calculations Office of Fair Trading)

 

The first simple interest loan has a lower APR than the equivalent compound interest example because the calculation of APR on compound interest loans is vastly different. So the original idea of comparing like with like goes out of the window. The two loans above cost almost exactly the same, but if you went on the APR you would be attracted to the first and think the second to be twice the cost. Herein lies the fallacy of APR. Wicked wool pulled over innocent eyes; buyer beware.

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