Gun To Your Head - If You Had To Choose...
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What does APR mean?
8 Answers
Might sound silly but I'm trying to sort out some debts with a credit card rather than a loan, and after reading various questions and answers, all of which are very useful if not a tad confusing, this APR thing keeps
popping up.
Also, I've heard that banks charge a lot more interest than internet offers... are these the same banks offering less than they would if you actually walked into the very same branch to ask for exactly the same thing??!!
Many thanks! X
popping up.
Also, I've heard that banks charge a lot more interest than internet offers... are these the same banks offering less than they would if you actually walked into the very same branch to ask for exactly the same thing??!!
Many thanks! X
Answers
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Sorry - I meant to give an example.
You borrow �1000.
At 5% APR you would pay interest at �50 per year.
10% APR = �100 interest.
This is just a very basic example.
Credit cards charge per month.
Therefore interest can be added on to interest so you pay more.
Simple example.
�1000 loan on credit card. Interest at 3% per month.
At end of month 1 you owe �1030.
You pay �25.
Next month you are charged interest on �10005.
If you pay �100 you arecharged interest on �930 next month.
A bank loan is different. You have to pay a higher monthly repayment and the APR is usually added annually.
�1000 @ 5% = total repayment of �1050 (if paid over a year).
�1050 divided by 12 monthly payments = �87.50 per month.
Hope this helps!
Hope this helps!
You borrow �1000.
At 5% APR you would pay interest at �50 per year.
10% APR = �100 interest.
This is just a very basic example.
Credit cards charge per month.
Therefore interest can be added on to interest so you pay more.
Simple example.
�1000 loan on credit card. Interest at 3% per month.
At end of month 1 you owe �1030.
You pay �25.
Next month you are charged interest on �10005.
If you pay �100 you arecharged interest on �930 next month.
A bank loan is different. You have to pay a higher monthly repayment and the APR is usually added annually.
�1000 @ 5% = total repayment of �1050 (if paid over a year).
�1050 divided by 12 monthly payments = �87.50 per month.
Hope this helps!
Hope this helps!
THANKS YET AGAIN, ETHEL!!!
So basically, that means if I get a loan, I have to pay the agreed sum monthly and a fixed amount interest at the end of each year, but with a credit card, I only pay what I can at the end of each month... but in danger of paying a lot more interest yearly, as I'm paying interest on the remaining balance of each month?
Ahhhhhh... I'm starting to get it, I think! That must be what Carol had meant when she said that I wouldn't be 'tied' to a loan!!!
So, if I was to be completely honest with myself, I would probably be better off with a loan, as it would be too tempting putting the payments off with a credit card!
ETHEL, you've really helped more than you could know!!!!!! XXX
So basically, that means if I get a loan, I have to pay the agreed sum monthly and a fixed amount interest at the end of each year, but with a credit card, I only pay what I can at the end of each month... but in danger of paying a lot more interest yearly, as I'm paying interest on the remaining balance of each month?
Ahhhhhh... I'm starting to get it, I think! That must be what Carol had meant when she said that I wouldn't be 'tied' to a loan!!!
So, if I was to be completely honest with myself, I would probably be better off with a loan, as it would be too tempting putting the payments off with a credit card!
ETHEL, you've really helped more than you could know!!!!!! XXX
With a loan the interest is calculated at the beginning and spread over the term - the repayment will be part interest and part repayment of the loan sum every month.
Credit card - you still have to pay a minimum every month, but very often that isn't even the interest from the previous month, so it can take a very long time to pay a credit card debt off - it grows!
I don't know your circumstances but whatever you decide to do it is far better to be realistic than optimistic. Be sure you can meet the repayments.
Good luck!
Credit card - you still have to pay a minimum every month, but very often that isn't even the interest from the previous month, so it can take a very long time to pay a credit card debt off - it grows!
I don't know your circumstances but whatever you decide to do it is far better to be realistic than optimistic. Be sure you can meet the repayments.
Good luck!
Sorry but Ethel is totally incorrect!
The 5% APR calculation is factually incorrect - �50 on �1000 would be 5% flat (around 9% APR)
It is also not always the lower rate the better:
If you borrowed �1000 over 10 months and paid back �1100 the APR will be 24.9% (from memory)
If you borrowed �25 off a mate and paid him back a pint (cost �2.50) and �25 2 weeks later, this would equate to an APR of over 300%.
APR is only a good guide if you are comparing exactly the same time periods. Then the lower is the better.
You cannot compare APRs on loans over 5 years and 7 years for example.
Always look for the amount repayable.
The 5% APR calculation is factually incorrect - �50 on �1000 would be 5% flat (around 9% APR)
It is also not always the lower rate the better:
If you borrowed �1000 over 10 months and paid back �1100 the APR will be 24.9% (from memory)
If you borrowed �25 off a mate and paid him back a pint (cost �2.50) and �25 2 weeks later, this would equate to an APR of over 300%.
APR is only a good guide if you are comparing exactly the same time periods. Then the lower is the better.
You cannot compare APRs on loans over 5 years and 7 years for example.
Always look for the amount repayable.
didwot you are right to make mention of the APR including the calculation for interest AND fees included in the facility, such as documentation fees etc etc... i used to work in consumer finance and can say that the APR figure is such a blunt and misleading tool and instead of doing what at first glance seems an admirable service, i.e inform a potential borrower of the cost of borrowing (the interest and any additional fees) it does no such thing in practise... ask many people how an APR calculation is made and you will normally see something similar to ethels description..
The examples oneeyedvic uses show the misleading nature of the "rev counter" approach, high is bad low is good...how much, how long, the best way to see the cost of borrowing is the total charge for credit calculation
the APR is ONLY of any use comparing like for like borrowing, same advance, same term from different lenders, then it does have a value i agree
i would certainly recommend instalment credit (a fixed term loan) over a credit card in relation to paying off existing debts. I have seen many people fall into the trap of over indebtedness, credit cards without the ability to repay them at the end of each month are a difficult trap to escape from, of course credit cards have their benefits but in all honesty normally only to those that have the funds to pay them off each month, those who cannot, pay for the facilities used by those who do.
The examples oneeyedvic uses show the misleading nature of the "rev counter" approach, high is bad low is good...how much, how long, the best way to see the cost of borrowing is the total charge for credit calculation
the APR is ONLY of any use comparing like for like borrowing, same advance, same term from different lenders, then it does have a value i agree
i would certainly recommend instalment credit (a fixed term loan) over a credit card in relation to paying off existing debts. I have seen many people fall into the trap of over indebtedness, credit cards without the ability to repay them at the end of each month are a difficult trap to escape from, of course credit cards have their benefits but in all honesty normally only to those that have the funds to pay them off each month, those who cannot, pay for the facilities used by those who do.
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