Unit 3 · Level 1 · Debt, honestly
Reading an APR
APR means annual percentage rate. On a loan it is meant to bundle the interest with the fees you cannot avoid, so two lenders can be compared on one number. Check how the yearly figure was built, though. A monthly rate multiplied by twelve is not the true annual cost, because it skips the compounding in between. A quoted European APR already takes that step for you. A number somebody worked out on the back of an envelope does not. Either way the APR is a starting point, not the full price.
Free to play. No ads, no token, no account needed to start.
What you get asked
A lender advertises a personal loan at 12% APR. What is that figure normally built from?
On a loan, the APR folds in arrangement and administration fees you have no way to dodge. That is exactly why it exists: a 10% rate with a €400 fee can be dearer than a 12% rate with none.
A card applies 2% to your balance every statement, and there are twelve statements a year. Once compounding is counted, what is the true annual rate, as a percentage?
1.02 to the power of 12 is 1.268, so the effective rate is 26.8%. Multiply 2% by twelve instead and you get 24%, which quietly hides nearly three percentage points of real cost.
A monthly rate multiplied by twelve always lands ___ the true yearly cost of the debt.
Below, every time. Interest added this statement earns interest on the next one, so the honest annual figure is the monthly rate compounded twelve times, never the monthly rate times twelve.
Match each term on a credit agreement to what it actually means
The teaser is the one that catches people. A 0% balance transfer for 18 months is genuinely useful, but the date it ends is the date the real rate starts, on whatever is left.
Two cards both advertise 19.9% APR. One of them also charges a €90 yearly fee. What follows?
If both cards quote the same rate and one also bills €90 a year, that fee is sitting outside the quoted number. On a €1,000 balance it adds roughly nine percentage points to your real cost. Read the rate, then hunt for the fees underneath it. 🐜
The rest of this unit
Compounding runs in both directions, and on a credit card it runs at you.