Introduction to APR or Annual Percentage Rate for Kids and Teens
This video explains the concept of Annual Percentage Rate in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about APR, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is APR
- How is Annual Percentage Rate calculated / how is APR different from regular interest rate
- Does APR include all fees
- What impacts the APR
- Loans with 0% APR
What is APR?
APR – or Annual Percentage Rate – is the yearly cost of borrowing, represented as a percentage.
The lenders are required to disclose the loan’s APR before signing the contract with the borrower.
How is APR calculated? And how is it different from regular interest?
The APR is higher than the regular Interest Rate because it is calculated by adding fees and other costs of the loan to the regular Interest Rate. Therefore, APR is a more accurate reflection of the total cost of borrowing.
Also, the lender is free to represent the interest rate on a loan as a monthly or quarterly rate, making it appear more appealing, whereas APR always refers to the cost of borrowing per year.
Does APR include all fees?
No. Lenders choose which fees to include in their APR.
This makes it difficult for consumers to compare loans across companies, because different APRs can include different fees in their calculation.
Which is better, a high or low APR?
Generally speaking, the lower the APR the better, because it means you will have to pay less in interest and fees.
However, like we discussed earlier, APRs for multiple loans are difficult to compare because they may or may not include all associated costs.
What factors influence the APR?
As you know, creditworthiness is represented by credit score. So people with a high credit score get lower APRs than people who have a lower credit score.
Sometimes, companies advertise loans with 0% APR. What’s that about?
Often, stores or credit card companies advertise 0% APR to entice people into making a purchase or getting a credit card from them.
However, you should be cautious of such claims, because it is highly likely that the 0% APR is an introductory offer which only lasts for a short period. After that, the APR can shoot up and be just as high – or even higher than – other loans.
When deciding on a loan, do not get swayed by claims of a 0% APR without doing your due diligence.