Help, I don't understand APR......

Urban_Tangleweed

Please can someone explain if I'm being thick ?

If I take out a loan for say £10,000 over 5 years, the APR is 6.6%, and over the term I pay back a total of £11713.80.

Now then, if we take the interest of £1713.80, this translates to 17.138% which divided by the 5 year term makes it 3.4276% per year (Much better than current mortgage rates).

Am I right in my calculation that the actual cost of the money is 3.5% per year and where does the 6.6% APR fit in ?

Sorry if the answer is obvious, I'm just confused about it.

mrmajika

No - you're wrong.

The APR is usually calculated daily on loans, so at the begining of the loan you're paying 6.6% on the full £10k. By year 4 (of a 5 year loan) you're only paying the 6.6% on a fraction of that, say about £2k, as you have already paid the bulk of the loan off.

All things considered the APR is 6.6%. The way you have calculated it is the way many car finance companies calculate their interest rates which is called a 'Flat Rate' - not an Annual Percentage Rate (APR).

nomoneytoday

Urban_Tangleweed wrote: »

Am I right in my calculation that the actual cost of the money is 3.5% per year and where does the 6.6% APR fit in ?

As above, you aren't borrowing the whole £10000 for the entire period.
Say you paid off £300 in month 1, the interest would be left on the £9700 balance etc

(that's simplistic as about £50 of the £300 in month 1 goes off the interest)