Calculating APR, Part 1 | Personal Finance Series #Finance

hey thanks for pressing play on this CashNews.co we’re going to be discussing the annual percentage rate or apr now before we go into some calculations one of the first things we want to address is really what is apr now apr is simply the cost that you pay each year to borrow money

now this cost also includes fees and other sorts of things such as service charges and is expressed as a percentage and really apr is really helpful because it not only reflects the interest rate that you are incurring but also any of these other sort of ancillary fees that we often don’t

think about when we’re evaluating a Loan now apr is great because it allows you to compare different Loan products so if you’re thinking about applying for a Credit card you can compare the apr between two different

Credit card options and make a decision as to which one will be better for you so in this CashNews.co as i mentioned before now that you have an understanding of really what apr is and the value of it we’re going to walk through how to calculate it and it’s going to be

a very simple process so to start us off let’s kind of create a little bit of a scenario for us to perform a few different calculations so let’s say that we’re going to borrow money and we’re going to borrow money just for simplicity’s purposes on the first of the year

so january 1st 2021 and we’re going to borrow 500 and we’re going to try to determine really what our apr is now there’s a couple of pieces of information we need to know the first thing we need is we need our interest rate so we’re going to abbreviate that as little i and

our interest rate i’m sorry but the interest that we pay over that period and that’s going to be 25 and just to add another element to it we’re going to add a service charge which i’ll show as c or sc and that’s going to be seven dollars now in order for us to

calculate apr we need to know a couple of things so apr and i’m going to write the formula over here equals any Finance charges that we incur and we divide that by the

principal which is the original Loan amount so our principal in this case is going to be the 500 because that’s the amount of money that we borrowed and all of the interest is really a derivative of that number but we also have this service charge figure so the first thing we

have to do is we have to figure out really what are these Finance charges well the text-decoration: none;">Finance charges are really any of the charges that we incur as a result of the Loan commonly interest but also things like service charges so if we were to add these two figures up together our

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance charges would actually be 32 dollars and then moving forward with the formula in order for us to figure out our apr we’re going to take those 32 dollars in service or

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance charges and we’ll divide that by our five hundred dollar principle now going through the math and the calculations you should get point zero six four or if you express as

a percentage remember apr is designed to be expressed in percentage form that is 6.4 percent now this is helpful because apr again is more inclusive of all of the charges associated with a particular Loan of some kind now if we were just to go off the interest rate right that would

simply be the 25 dollars that we paid divided by 500 right so in that case we’re really only looking at 0.05 or five percent but this isn’t really an accurate representation of what our real cost is because we do have service charges and other things so from a Credit

card standpoint you would obviously include whatever interest charges you incur but if your Credit card for example has a annual fee which is not incredibly uncommon especially if your Credit card provides a great deal of rewards points and those sorts of things

those are things we want to consider because that is a part ultimately of what we’re paying so hopefully now with a little bit of understanding of how to calculate apr one you can do this for a class of some kind if that’s what’s that’s what you need it for but also from a

personal Finance standpoint it allows you to again get a better idea of what you’re really paying what your true cost of Credit is and also helps you

evaluate those different options so when you see apr expressed on maybe terms and conditions of a Loan you’re going to have an understanding of what that is in reference to all right thanks for watching