Introduction to APR vs Interest Rate for Kids and Teens
This video does an Annual Percentage Rate or APR vs Interest Rate comparison in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about APR and interest rate, 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 interest rate
- What is APR or Annual Percentage Rate
- Annual Percentage Rate vs Interest Rate: Differences
- APR vs Interest Rate: Which is better
What is interest rate?
Interest rate is usually quoted per year, but sometimes it could be quarterly or monthly.
Interest rates can be fixed or variable through the life of the loan.
What is APR or Annual Percentage Rate?
APR or Annual Percentage Rate is the cost of borrowing per year represented as a percentage. In addition to the interest rate, APR includes fees and other costs of the loan.
Lenders are required to disclose the loan’s APR before signing the contract with the borrower.
What are some of the differences between interest rate and APR?
Annual Percentage Rate is always higher than the regular Interest Rate. This is because it is calculated by adding fees and other costs of the loan to the regular interest rate.
Another difference is that 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.
Also, APR is only associated with loans whereas interest rate is also applicable to deposits, where banks or credit unions pay interest on the money deposited in your account.
Which is better: APR or Interest Rate? When should each be used?
When figuring out how much your monthly payment would be, you should look at the interest rate. However, Annual Percentage Rate is preferable when comparing loans, as it is a more accurate reflection of the total cost of borrowing.
But you need to keep in mind that lenders may not include all fees in the APR, making it difficult for consumers to compare loans across lenders.