How APR on loans is calculated.

[Snafu03]

Now I know I'm no mathematical genius but I saw an advert for a loan which stated;

If you borrow 10,000 the total you pay back is 11,216.64 at 5.9% pa.

How does this work? surely even if it was 10% APR you'd only end up paying back 11,000?

Do they add 5.9% of what you owe on the loan each year?

[dzug2]

It will be 5.9% of the remaining balance each year - or a proportion each month if you are paying monthly

[factor-fiction]

The total repayments will depend on the APR and the length of the repayment period. In the case of this add the repayment period may be something like 3 years. There are online calculators for working these out

[factor-fiction]

I think it's nearer 4 years actually, with first payment made immediately.
Another factor in the APR is whether there is any admin charge. Also the APR will be affected if there is a large final payment as on some car loans.
http://www.prudentmin...-loan-calculator.html

[Snafu03]

thanks all. I understand it a bit better now!

[LazarusShort]

These are usually calculated daily and updated monthly so after the first payment you owe less than 10k so the calculation has to take account of that. You are assuming no repayment element, so if you borrowed 10k at 10% for a year and then repaid it after a year then that would be 11k. In reality that's rare. The APR also takes account of fees and charges that may be added on too.

[Buenchico]

I've got a degree in maths but I'd rather not try to explain APR!

There are different ways of calculating it in different countries (so rates aren't always directly comparable) but you can find the formula used in the EU here:
http://en.wikipedia.o...e_rate#European_Union

Chris