APR

An APR — an annual percentage rate — restates what a product costs as a single yearly figure worked out on the balance you still owe. It exists because lenders quote in incompatible units. One offer is a percentage a month, another a flat rate on the original sum, a third a total markup agreed at signing, a fourth a fixed fee. None of those four is comparable with any of the others as printed, and the APR is the conversion that makes them so. The same conversion, run on a deposit, is usually called the effective annual rate.

Without it you cannot tell which of two offers is dearer, and the ranking really does change. A markup of 5,000 on a 10,000 purchase repaid over 48 instalmentsTermBuy now pay later×التقسيطA purchase you make today, paid back in installments over weeks or months rather than all at once.Open the term looks like 12.5% a year — five thousand spread over four years. Worked as a rate on a balance that shrinks with every payment, it is close to 24%.

The gap is not a trick played on you. It comes from the fact that you do not owe the full 10,000 for four years; you owe less of it every month, while the markup was calculated as though you owed all of it throughout. A flat rate always understates the cost for the same reason, and the shorter the term the wider the understatement.

• Ask for the APR and for the total amount repayable in cash. Those two numbers make offers comparable; the monthly instalment does not, because it can always be lowered by lengthening the term.
• It is a conversion, not a fee. An APR does not add anything to what you pay; it restates what you were already paying in a unit that can be compared.
• A rate compounded more often than once a year is higher than it looks. Twelve steps of 1% land on 12.68%, not 12% — and the gap grows with the rate, from about a tenth of a point at 5% to four and a half points at 30%.
• What an APR includes is not fixed everywhere. Some regimes require arrangement fees and insuranceTermInsurance×التأمينA contract where you pay a regular fee to transfer the financial risk of a specific event to a company that agrees to cover the cost if it happens.Open the term inside it and some do not, so an APR is comparable with another APR from the same market before it is comparable with one from elsewhere.
• The same arithmetic run on a savings product is the effective annual rate. It answers the same question from the other side: what the advertised rate actually pays once you count how often it is applied.