APRs, the simple explanation
Posted on: 27 October 2015
20.00% APR – many of us generally know what this means but when pressed to explain it… well, we not that sure anymore! This post will break down those famous three letters A, P, R so you can feel confident at the table the next time you see APR.
APR stands for annualized percentage rate. In plain English, APR is how much you need to pay to borrow this money for 1 year. The percent sign (%) is used so the APR can be used with the amount you want to borrow to calculate exactly how much you will need to pay borrow this amount for 1 year.
Let’s get to the example, a $100 loan at 20.00% APR. To calculate how much it would cost you to take out this loan for 1 year, you multiply the amount of the loan ($100) * the APR (20.00%), which gives you $20. This means that you must pay $20 to borrow this $100 loan for 1 year. If you borrow for half of a year, you pay half as much. It’s that simple!
Sometimes people try to get fancy with things like XXX or YYYY, but don’t let them confuse you! All you have to do is ask for the APR and they must give you what we’re talking about here. That’s the law!
So the next time someone tells you an APR, pull out your phone and multiply the amount you are borrowing with the percentage rate they tell you; that will tell you how much you owe them after a year.
Now we know it’s not this easy all the time. Sometimes lenders only let you borrow for a few weeks or want you to pay every month. The worst sell you on a small rate (note: not APR!) in big print that is actually a very high APR buried in the unreadable fine print. We will touch on all of these details in time. Until then, you can always reach out to us if you need more help (email@example.com).