r/personalfinance • u/aroba- ​ • Jul 04 '24

explain APR to me like I'm five Debt

just asked for a 6k loan with a 27% APR and the total charged interest sums almost 58 hundred. So the cost of asking 6k is gonna cost me almost 100% of the money lendered in a period of five years. Math is not really mathing or APR's are not what they seem at first view. Although I suck at being financial literate so that makes sense actually

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u/doubagilga ​ Jul 06 '24

The interest is calculated on a period. The interest is only calculated on principle, not accrued interest. That is the definition of simple interest.

In a bank deposit, earning interest on your interest is the compounding function. It is the very definition of compound interest. The period on which interest is calculated has nothing to do with the principle on which it is calculated.

99% of car loans are not compound interest. You never pay interest on interest. https://www.investopedia.com/terms/c/compoundinterest.asp#:~:text=Compound%20interest%20is%20interest%20calculated,monthly%2C%20quarterly%2C%20or%20annually.

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u/ThePotato363 ​ Jul 08 '24

The interest is only calculated on principle, not accrued interest. That is the definition of simple interest.

As soon as that interest becomes principle, which happens every period, it is compound interest. Sorry.

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u/doubagilga ​ Jul 12 '24

The interest never becomes principle. I am not guessing, you are.

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u/ThePotato363 ​ Jul 12 '24

Check out the other guy replying to me. He gave an excellent table of what he thought was simple interest. You can see how on each line the interest becomes principle.

My guess/hope is you can calculate the numbers but are just confused by the terminology.

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u/doubagilga ​ Jul 12 '24 edited Jul 12 '24

Just because both of you don’t understand doesn’t mean either of you are right.

I=Prt vs A=P(1+r /n)nt

There’s no debate here. Simple interest uses for formula on the left and each payment in the month does not include interest on the accrued interest in the month, as calculated in the formula on the right. For the same interest rate and period, simple interest results in lower values of interest payments.