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Thick question - exactly how does APR work?

(5 Posts)
Ilovemydogandmydoglovesme Thu 20-Jun-13 17:48:09

Am thinking of borrowing some money and just realised that I'm not exactly clear how APR works. I know it's an annual percentage of the amount you borrowed, but do you pay back the same percentage of the original amount borrowed each year? Or is it recalculated based on the outstanding balance, like a mortgage?

Eg if you borrow £1,000 and the APR is 10%, and you paid it off over two years, would you pay £100 the first year but only £50 the second year because you only have £500 of the original loan amount to pay the second year? So if you worked it out over the two year duration of the loan you'd pay £150 in interest? Which is 15% of the original amount!

That's not what I'm borrowing, that's just my nice simple example.

Ilovemydogandmydoglovesme Thu 20-Jun-13 19:26:24

Have tried to follow the Wikipedia example and now I have brain freeze.

caroldecker Thu 20-Jun-13 19:46:45

APR over a period is (broadly) calculated to show the interest charge at a fixed annual rate.
In your example, you would take the total borrowed 1,000 and the total interest charged 150 and work out a %, ie 7.5%. There are complexities, which make the individual calculations harder, such as fees and when the payment is made - if you paid the interest at the end of the period, it would have a lower APR than if paid up front (broadly speaking money in your hand today is more valuable than money you get next year)

Bearandcub Thu 20-Jun-13 19:48:49

Ooh I have a new MN crush! Thank you for helpful explanation.

Ilovemydogandmydoglovesme Thu 20-Jun-13 20:54:13

So how is it worked out? Do they take a percentage x number of years of repayments and add it to the total amount you owe? I need an APR calculator!

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