What is the difference between APR and interest rates?
In: Economics
The APR is the Annual Percentage Rate or if you kept the loan for a year how much interest would you have to pay – https://youtu.be/a22RkoupEgE
In short, an APR (Annual Percentage Rate) *is* an interest rate.
The difference you see between interest rates of the same product can be attributed to how the quoted rate is accounting for compounding. In the case of an APR, it doesn’t account for any compounding. Quick example below..
A loan has an interest rate of 1%/month. Since there are 12 months in a year, 12 x 1% = 12% = APR.
However, since that loan charges 1% of interest every month, you will now owe 1% of interest on the interest you accrued the month before. To account for that, we compound the interest – 1.01^12 = 12.68% = EAY/EAR (Effective Annual Yield/ Effective Annual Rate)
This is a better representation to the actual costs of taking this loan. APRs are often quoted as the rate for the person lending since it seems less than what you pay, and the inverse is true for people looking to invest in the loan because a higher rate of return is more appealing (and accurate for calculation purposes)
**ELI5 (Attempt) ** – Your teacher will give you a bank of 10 points for extra credit to use on your final (finger painting) exam. For every month you don’t miss a day, she/he will give you 1% more bonus points than you have in your bank. (12% APR).
The actual realised amount of bonus points is more because ever month your bank grows 1%, so each consecutive months you are taking 1% of a larger number.
APR annualizes fees that aren’t represented in the interest rate. It allows you to understand the total cost of the loan which isn’t the interest rate by itself.
Interest is money charged to borrow money.
APR is a way to measure an interest rate across a standard set of time (a year, the A stands for ‘Annual’). Not every Loan is expected to be paid off within exactly a year so APR is a good way to measure the true cost of a loan or to evaluate two different loan terms against each other.
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