Annual Percentage Rate (APR) and effective APR | Finance & Capital Markets | Khan Academy

The difference between APR and effective APR. Created by Sal Khan.

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Finance and capital markets on Khan Academy: Most of us have borrowed to buy something. Credit cards, in particular, can be quite convenient (but dangerous if not used in moderation). This tutorial explains credit card interest, how credit card companies make money and a far more silly way of borrowing money called "payday" loans.

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[josel]

This man has taught me for years more than my education could ever

[ozzyfromspace]

Daing, I almost set up a “certificate” that my bank offered me because APR (and effective APR) sounded like a good thing. Glad I immediately went online to learn about it. Thanks Sal, for saving me some needless heartache. Wishing you the best!

[matzemd]

I love how you always repeat every word you write down twice :D

[DavidTheConqueror]

Why dont we teach this in high school?

[joeventre]

Thank you for this video! I was applying for a personal loan today and the math wasn’t adding up for the interest I would owe vs the apr. when I called the bank to ask why my math wasn’t adding up they told me they didn’t know, and no one at the bank could explain it to me. I asked if the interest was compounding and they said no but clearly it was, just in this sneaky way you’ve described. Bankers/creditors are without question the most brazen criminals in this country, and they get away with it by hiding their lies in math. Thank you again this is incredibly informative

[AnonYmous-iwrh]

Wouldn't you raise it to the 364th power (since you didn't pay any interest on the very first day)?

[UNRPACK]

Also;
.229 divided by 365, Plus 1, to the 365 power, Minus 1=0.2573

[tyesco]

Thumbs up for the trusty Ti-85! Keepin' it old school...literally.

[johanp]

You have to be careful when using the term APR since it is an ambiguous term. What confuses in consumer loan and bank statements is actually the APRC (Annual Percent Rate of Cost) .

The APRC is formally defined as: The nominal annual interest level that equates the present value of all drawdowns with the present value of all repayments (the present value cashflow=0) . (In definition it is written as a mathematical equation - two geometric sums equated).

This is the official definition used by both FCA and EU regulations. It is not in itself a terribly complex thing to explain but it takes a bit more math and an hour and half or so to explain to a layman. It is often misunderstood and even banks calculate it incorrectly. Especially when used for very short loans (a couple of months) where it can give numerically very high values (can easily be >> 10000%) due to the often very high fees on short loans.

The detailed calculation is also dependent on the date convention used (the simplest being if you take into account leap year or not). Formally then EU regulation is not clear on this (and worse - is even self contradictory). However, the FCA regulation clearly states that leap years needs to be taken into consideration and that a month is 365/12 days.

[Koolguy]

THANK YOU SO MUCH YOU HAVE A NATURAL GIFT

[RobertoTorres-smrs]

Pay for tuition at uni to receive a youtube education lmao

[SonyaMoon]

do you use a pen, or do you write with the mouse? Because your hand writing looks really neat

[jameshanley]

Isn't this only correct if the card issuer is applying interest daily? A lot of issuers will use a daily rate but will calculate it at the end of the statement period. Therefore, the compound element comes from the time between statement date and payment date.

[muhammedsahal]

how it get to 25.75%? we are to add this to the principle interest rate 22.9 % then it would be 24.15%?

[vietphung]

Can you tell me where can you get the effective annual rate is 25, 7% ? Is it from a calculation or something ? I'm still confused of this part. Thank you

[davidreames]

so the day1, day2 calculations are based on a $100 balance or a $1 balance? He said $100 then $1.

[PinayCapturedMoments]

I was wondering how did you get 0.06274. I hope you post more videos to help college students like me to understand Math because I wasn't really good at it.

[einsatzgruppencommander]

So if the effective APR is actually 25.7%, even with no late fees or penalties. What exactly does a 22.9% represent? Would that be your actual APR, only if you paid interest every day? (0.0006274% every day, instead of paying all interest on day 365?)

[dinsdins]

Do I still pay apr if I always make payments on time?

[markdunsing]

I feel guilty after watching this. If only I had known then what I do now