APR explained
Training 425 minutesAPR explained
You are 31, a designer who needs a $1,000 laptop. Ads shout "just 10%" and "0% interest". Time to read the number printed small at the bottom.
Training goal: Compare loans by their full cost
▶ Play this trainingSituation
1. Bank A lends $1,000 at 10% for a year but charges a $100 setup fee. Bank B lends at 16% with no fees.
- Bank A, 10% is less than 16%
- Bank B, no fee makes it cheaper
- Bank B, but borrow $1,500 for a stronger model
2. The store offers "0% installments": six payments of $110 for a $600 laptop.
- Great, that is interest free
- Multiply payment by term, compare to price
- Take it, the payment is small
3. The loan officer adds $8 a month of insurance and says the loan will not be approved without it.
- Ask if it is required and get that in writing
- Sign, if that is the rule
- Walk out without asking
4. You now have three offers. The payments look similar, the terms differ: 12, 18 and 24 months.
- Pick the longest term, the payment is lowest
- Take whichever gets approved first
- Compare APR and total repaid
What you will learn
- The interest rate and the APR are different. Compare by APR.
- Fees, insurance and "0% installments" often hide 20 to 30% a year.
- All payments minus the price equals what the loan really costs.
Your real-life step
Find the APR and the total repayment in your loan contract. Compare them with the rate in the ad.
Questions and answers
What is APR?
The yearly cost of a loan including the rate, fees and required charges. It shows what borrowing really costs.
What is the difference between interest rate and APR?
The rate covers interest only. APR adds fees and insurance, so it is almost always higher.
Is 0% financing really free of interest?
Sometimes the store pays the lender. Check: if the payments add up to more than the price, you are paying interest.
More trainings in this module
- Good debt vs bad debt
- Credit score
- How to build credit
- How to get out of debt
- Clearing debts: the snowball
- Credit cards and interest
Numbers are illustrative. A game, not financial advice.