Calculating APR, Part 2 | Personal Finance Series

[frenchtoasties]

This helped me so much, the text book didn’t make sense but you explained it perfectly thank you

[thanommitpasong]

Hi there! Thank you for the lecture. Could you please explains the development of the formula from the formula in video part 1? For example where does 2 come from in this formula?

[craign]

Thanks for this but the more I think about APR the less it makes sense. So if I got to an actual loan calculator and put in say $3000 at a 5% interest rate with no fees (so essentially an APR of 5%) for a year then it works out that the total payment back for that, i.e. the interest, would be $81.87. So over a year (annual) it is $81.87 plus my $3000, which works out at 2.7%. So why isn't the APR 2.7%?

I think what I've worked out is the APR is basically the amount that they would charge you in interest, if you paid none of the principal back. i.e. if you had borrowed $3000 for the year, paid none of it back but just paid the APR then you'd pay the "initial" monthly interest payment of $12.50 x 12 times ($150) then that is 5% but that's mad because you don't not pay any principal back! 🥴 Nowhere can I find this explanation of it but that has to be what it is?

Is that right? It just seems a crazy metric, as it doesn't really mean anything. For a year, you actually pay less than the "APR" of 5%, at 2.7%, but if you did the same amount over 3 years, then it is 7.9% so maybe it's to average it out? 🤷‍♂

[sergiovivas]

Greetings; could you please let me now where did you get the formula from? any reference.. I appreciate the time for explaining ¡