Confused about Credit Card APR!!

asglasspole

Hi,

I've been reading the following MSE post about credit card loans (I'm not allowed to post URL links, so just add the required to front of the URL):

moneysavingexpert.com/loans/plastic-loans

I'm a bit confused about the 'What's the interest rate?' calculator towards the bottom of the page. As a test, if I enter an amount of £1000, over 12 months, with a fee of 4% and rate of 0%, it comes up with an APR of 8.1%. I would have thought that paying it off in 1 year, with 0% interest and just 4% fee would have been a 4% APR (4% per year).

Can someone explain why it's 8.1%?

Regards,
Andy

CLAPTON

lets suppose you borrow £1000

if there is a fee of 4% you are charged £40

now if you make equal payments each month your AVERAGE debt is approximately 500 over the year (initally 1000 of course but decreasing each month)

so the APR is 40/500 = 8% approx.

asglasspole

Thanks for the very quick response!!

I must say, that sounds a bit bonkers to me, if I saw an 8% APR I would be expecting it to cost me 8% per year, but in this example it's going to cost me 4% for the year!!

StuC75

Thats why they quote it as Interest Rate 4%, APR 8%.. Both figures are correct, its just that people easily confuse the two.. perfect description from Clapton..

thenudeone

If you had been offered two loans,

1) £1000 for 12 months, no repayments until the last day when £1000 is repaid. Total cost of interest £80

1) £1000 for 12 months, equal repayments of 1/12th every month for 12 months. Total cost of interest £80

Both have the same interest charge but for every £1 that you borrow for 1 day you are paying twice as much with loan 2 as loan 1.

You can't ignore the fact that by the last month of loan 2 you've already paid most of the balance back whereas with loan 1 you haven't paid anything back at all, so loan 1 is clearly a cheaper loan even though the interest charge in £s is the same.

The APR take account of these differences.

CLAPTON

asglasspole wrote: »

Thanks for the very quick response!!

I must say, that sounds a bit bonkers to me, if I saw an 8% APR I would be expecting it to cost me 8% per year, but in this example it's going to cost me 4% for the year!!

ok try this

-you start a saving a/c that pays yearly interest at 3% AER
-you open it with £1
-then 364 days later you put £999 in the a/c making a total now of 1,000
-they pay your yearly interest on the following day
-do you expect
a. 3% of £1 i.e. £0.03p approx?
or b. 3% of £1,000 i.e. £30 ?
-or something else?



you are charged interest on loans on your DAILY balance just as you earn interest on your savings on your DAILY balance even if it is paid yearly or whatever