Really confused about APR, please help!

orangepeel105

Okay I am a postgraduate student looking at taking out a particular type of loan. I want to borrow £1500 and we'll say the APR is 10%. I can have the loan for 12 months without making any repayments, and after the 12 months I intend to pay the loan back in full (there are no charges/fees for early payment). My question is, roughly how much will I end up owing/paying after the 12 months?

It might seem like a stupid question but NO ONE seems to know the answer

Thanks!

CLAPTON

Assuming this isn't a joke but what the hell

1500 borrowed over 1 year at 10% APR will incur 150 (ie 1500 x 10% ) in interest so you will owe 1500+150 = 1650.

Rafter

As you are a postgrad student you can cope with the mathematical solution:

The APR is the discount rate at which the future cash flows (both interest and repayment) = the initial loan amount.

Turning this around to answer your question, the future value of your £1500 loan to be repaid is £1500 x (1+10%)^1 = £1650 so the £1650 that clapton has shown above.

Where it gets more complicated is where you have monthly rates, up front charges etc which also get factored into APR calculations, particularly for credit cards.

Should help you (or anyone else reading this) with getting to sleep!

R.

orangepeel105

Thanks, it wasn't a joke I originally thought that would be the amount to be repayed but then a couple of my friends were trying to tell me that it would be more than that because I would have to pay interest on the interest earned every month. I then posted the question in a different forum and received lots of different answers which threw me off even more.

Thanks for your clarification though

CLAPTON

Just to add ... the point of quoting an APR is that it takes into account of how interest is charged ..daily, monthly, quarterly yearly etc which is why it is usually the best guide to the real rate of interest.

nomoneytoday

orangepeel105 wrote: »

Thanks, it wasn't a joke I originally thought that would be the amount to be repayed but then a couple of my friends were trying to tell me that it would be more than that because I would have to pay interest on the interest earned every month. I then posted the question in a different forum and received lots of different answers which threw me off even more.

Thanks for your clarification though

You do, that's the point of APRs - to standardise the formulae.
If you paid it back evenly every month the APR would be lower and the debt paid off quicker