Annual Percentage Rate (APR) and effective APR | Finance & Capital Markets | Khan Academy
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- Опубліковано 27 вер 2013
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The difference between APR and effective APR. Created by Sal Khan.
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Finance and capital markets on Khan Academy: Most of us have borrowed to buy something. Credit cards, in particular, can be quite convenient (but dangerous if not used in moderation). This tutorial explains credit card interest, how credit card companies make money and a far more silly way of borrowing money called "payday" loans.
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This man has taught me for years more than my education could ever
I love how you always repeat every word you write down twice :D
Why dont we teach this in high school?
Arsenal FC Fan they do, they just teach it poorly. Hence why I'm here
BECAUSE YOU MUST KNOW HOW TO FIND TANGENT LINES OF DERIVATIVES haha
It wouldn't benefit the companies that profit from it. All companies and corporations, no matter what their profession profit off the ignorance of others. You don't know something, you pay money to someone that does know. It's a vicious cycle and it's up to us to look out for ourselves it seems.
Because the system we live in teaches basic options for being an employee in a corporation, Not a problem solver or an entrepreneur.
@@simboy37 facts💯 great explanation!
Daing, I almost set up a “certificate” that my bank offered me because APR (and effective APR) sounded like a good thing. Glad I immediately went online to learn about it. Thanks Sal, for saving me some needless heartache. Wishing you the best!
I am here because I am learning all these APR and APY terms before opening an account for Ally Bank and Sofi money.
@@Mister_Soyuz_on_YT no one asked
@@randomclips8575 Looks like someone pooped on your parade. 😂
@@randomclips8575 yo, you good?
Thank you for this video! I was applying for a personal loan today and the math wasn’t adding up for the interest I would owe vs the apr. when I called the bank to ask why my math wasn’t adding up they told me they didn’t know, and no one at the bank could explain it to me. I asked if the interest was compounding and they said no but clearly it was, just in this sneaky way you’ve described. Bankers/creditors are without question the most brazen criminals in this country, and they get away with it by hiding their lies in math. Thank you again this is incredibly informative
Also;
.229 divided by 365, Plus 1, to the 365 power, Minus 1=0.2573
Wouldn't you raise it to the 364th power (since you didn't pay any interest on the very first day)?
THANK YOU SO MUCH YOU HAVE A NATURAL GIFT
Thumbs up for the trusty Ti-85! Keepin' it old school...literally.
Pay for tuition at uni to receive a youtube education lmao
Great video explaining this concept!
i cant believe im just learning this
Isn't this only correct if the card issuer is applying interest daily? A lot of issuers will use a daily rate but will calculate it at the end of the statement period. Therefore, the compound element comes from the time between statement date and payment date.
You have to be careful when using the term APR since it is an ambiguous term. What confuses in consumer loan and bank statements is actually the APRC (Annual Percent Rate of Cost) .
The APRC is formally defined as: The nominal annual interest level that equates the present value of all drawdowns with the present value of all repayments (the present value cashflow=0) . (In definition it is written as a mathematical equation - two geometric sums equated).
This is the official definition used by both FCA and EU regulations. It is not in itself a terribly complex thing to explain but it takes a bit more math and an hour and half or so to explain to a layman. It is often misunderstood and even banks calculate it incorrectly. Especially when used for very short loans (a couple of months) where it can give numerically very high values (can easily be >> 10000%) due to the often very high fees on short loans.
The detailed calculation is also dependent on the date convention used (the simplest being if you take into account leap year or not). Formally then EU regulation is not clear on this (and worse - is even self contradictory). However, the FCA regulation clearly states that leap years needs to be taken into consideration and that a month is 365/12 days.
Is this relevant for the US?
Thank you!
Thanks a lot !
Damn great explanation.
I still dont understand why he converted 0.06274 to decimal, whats the purpose of that?
@@booklibrary2884 Calculation. 15% of 120 is 18, but how would you find that out mathematically? Well convert 15% into a decimal....0.15. Just a different representation of a percentage that allows us to do calculations. Now multiply that by 120. You get 18.
Very well explained
so the day1, day2 calculations are based on a $100 balance or a $1 balance? He said $100 then $1.
do you use a pen, or do you write with the mouse? Because your hand writing looks really neat
Sonya Hamill I'm guessing a pen/tablet combo like a WACOM tablet.
@@dcholmes1969 Yes, that's exactly right!
how it get to 25.75%? we are to add this to the principle interest rate 22.9 % then it would be 24.15%?
Sooooooooooooooo helpfull
Can you tell me where can you get the effective annual rate is 25,7% ? Is it from a calculation or something ? I'm still confused of this part. Thank you
From the 1.257 calculated which means he owes 100% + 25.7%.
There is a formula where i=stated interest rate, and n=number of compounding periods: (1+i/n)^n-1 or (1+0.229/365)^365-1
I was wondering how did you get 0.06274. I hope you post more videos to help college students like me to understand Math because I wasn't really good at it.
Did you even watch the video? He gives the answer to your question within 30 seconds...
22.9/365(amount of days) = 0.06274 %
I saw costs.
Thank you sir!
now how do I do it backwards?
So if the effective APR is actually 25.7%, even with no late fees or penalties. What exactly does a 22.9% represent? Would that be your actual APR, only if you paid interest every day? (0.0006274% every day, instead of paying all interest on day 365?)
Hmmm what you say sounds right.
The 22.9% figure is simply there as a means of comparison. Societally, we all decided to use annual rates in order to have a figure of COMPARISON with other loans, despite how frequently they compound.
For example, if you want to compare a loan of 25% APR compounded monthly (annual interest) and a loan of 22% APR compounded monthly (annual interest) with another loan just on a superficial basis and you don't care about how frequently each is compounded (which you really should), just the APR value serves as a way to compare. Here you could say, with all things equal, that the second loan is a better deal.
But you ALWAYS have to be careful of how often something is compounding because APR DOES NOT take into account compounding. The more frequent something compounds, the worse the difference between APR and APY (or effective annual rate) will be. So in our example, if the first one was 25% APR compounded monthly vs a 22% APR compounded DAILY, then that would make the comparison a bit closer.
Do I still pay apr if I always make payments on time?
Yes you do. If you pay late they add fees
So, APR, for banks, is avoidable if certain conditions met? Like, if I just leave my money on an interest savings account and a checkings account, would APR still be in effect?
To clarify are you using 1 for the 1 dollar as for an example? so If I use like 5000$ this how you would equate for that as such? Thank you in adv.!
I hope someone answers too. Am wondering as well.
The formula for compound interest is P (1 + r/n)^(nt), where P is the initial principal balance, r is the interest rate, n is the number of times interest is compounded per time period and t is the number of time periods.
math and financial advice
what would the rate be if 0% APR
So in other words the APR is the Nominal Interest Rate and Effective APR is, well, the Effective Interest Rate? Thanks!!
I feel guilty after watching this. If only I had known then what I do now
Sal? Where is Khan
Man credit card is such a scam.
154
what college course teaches this?
Finance!
Account.
I dont understand 0.06.... = 0.0006... ??
Slow down Sal, explain how you calculated the effective APR..... D:
Using formula: ((1+r/m)^m)-1= ((1+22.9%/365)^365) - 1 = 1.257 - 1 =0.2572 or 25.7%
@@tinguspingus6729 lol that doesn’t help 😂
@@tinguspingus6729 what is that a pie recipe please 😭💀
how did he get 25.7% effective apr ?
He subtracted 1 from 1.257 and got .257 and then made it into percentage
EAPR = (1+(0.229/365))^365-1
I still dont understand why he converted 0.06274 to decimal, whats the purpose of that?
@@booklibrary2884 He converted to a decimal so you can calculate. One percent (1%) interest is a word, meaning you cannot use it to perform a calculation.
For example if I ask you what's 5% of $100. You would not multiply $100×5% because that would not make sense.
You would multiply 100 × 0.05 and get 5 dollars as your answer.
L&S
I don't even try.
Huh
loan amount = 20000, processing fee = 400, Disbursed amount = 19600, interest = 3274, Total Payment by Customer = 23274, Tenor Years = 24 Months, Emi Monthly = 970, I have this question. How to calculate APR for this amount please tell me formula and explain, it is my request please help me.
I’m dumb I don’t understand
Nope don't get it...like eating dry toast