What is APR? Let’s break it down.
EXPLAIN LIKE I’M 5
ELI5: What is APR?
APR can be thought of as the “price” for borrowing money.
Just like when you shop, you compare the prices on different items, in the same way, when you borrow money, you compare the APR on different loans. The lower the APR, the less it will cost you to borrow the money over time.
APR stands for annual percentage rate. It’s a way to measure how much it will cost you to borrow money or use a credit card over the course of a year. When you take out a loan or use a credit card, you’ll see an APR listed somewhere in the terms and conditions. This number is important because it tells you how much you’ll have to pay back in addition to the money you borrowed.
For example, let’s say you borrow $100 from a friend and agree to pay them back $110 after one year. The APR in this case would be 10%. This is because you’re paying an extra $10 in addition to the $100 you borrowed.
APR vs Interest Rates on Loans
APR is different from the interest rate on a loan. The interest rate is the amount of money you’ll pay to borrow money, and it’s usually expressed as a percentage. So if the interest rate on a loan is 5%, and you borrow $100, you’ll pay an extra $5 in interest over the course of a year.
APR takes into account not only the interest rate, but also any other fees or charges that come with borrowing money. For example, if you take out a loan and there’s a origination fee of $50, the APR will be higher than the interest rate because it includes the cost of the fee.
Why is the APR important?
It’s important to pay attention to the APR when you’re borrowing money or using a credit card. This will help you understand how much it will cost you in the long run. If you see a loan with a high APR, it might mean that it will be more expensive to borrow the money. On the other hand, if you see a loan with a low APR, it might be a good deal because it will be less expensive to borrow the money.
When you’re comparing different loans or credit cards, it’s a good idea to look at the APR to see which one is the best deal. Just keep in mind that the APR is only one factor to consider. You should also look at other things like the repayment terms, any fees or charges, and whether you can afford the monthly payments.
In summary, APR is a measure of how much it will cost you to borrow money or use a credit card. It takes into account the interest rate as well as any other fees or charges. Paying attention to the APR can help you understand the true cost of borrowing money and find the best deal.
Want to learn more about APRs?
Here are some helpful resources to extend your understanding of APRs beyond what we were able to explain:
