1.1 Debt, Interest & APR Check out the ‘simple interest explained’ video at www.moneyskool.org www.moneyskool.org © moneyskool.org 2015.

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Presentation transcript:

1.1 Debt, Interest & APR Check out the ‘simple interest explained’ video at © moneyskool.org 2015

There are lots of different ways you can get into debt. In January 2015, personal debt in the UK stood at £1,469,000,000,000! mortgages student loans credit cards payday loans overdrafts hire purchase unpaid bills loan sharks charges & fines © moneyskool.org 2015

When you borrow money, you have to pay back the money that you borrowed AND you also have to pay extra money on top, which is called INTEREST TOTAL PAYMENT = MONEY BORROWED + INTEREST © moneyskool.org 2015

Instead of paying £ cash upfront for a laptop, you could borrow the money to buy it and pay for it in instalments In this example, you would pay £1, (104 weekly payments of £13.97) – that’s more than £600 of interest on top of the cash purchase price! EXAMPLE – HIRE PURCHASE © moneyskool.org 2015

The amount of interest which is added to your debt is controlled by a PERCENTAGE called the INTEREST RATE. Interest rates can vary a lot… 3% is a typical yearly interest rate for a mortgage 20% is a typical interest rate for a credit card Illegal lenders charge very high interest rates – sometimes as high as 350%! © moneyskool.org 2015

Percentages are all about splitting things into 100. If you take something and split it into 100 equal sized pieces, each piece is 1% of the total © moneyskool.org 2015

If you borrow money at a 20% yearly interest rate, interest which is equal to 20% of your debt is added every year. So if you don’t make any payments for one year, your debt will be 20% bigger at the end of the year than it was at the start of the year. © moneyskool.org 2015

The interest rate makes a big difference to how quickly your debt grows…at a 350% interest rate your debt would grow 4.5 times larger after one year (if you don’t make any payments) © moneyskool.org 2015 This table shows how your debt would grow if you borrowed £1,000 and didn’t make any payments for 1 year

The APR is a type of yearly interest rate which lenders have to show when they advertise loans. APR stands for Annual Percentage Rate. © moneyskool.org 2015

In many cases the APR is the same as the yearly interest rate… This is taken from an advert for a credit card where the yearly interest rate is the same as the APR © moneyskool.org 2015

But if a loan comes with extra charges on top of the interest then the APR will be higher than the yearly interest rate This is an advert for a credit card where the APR is higher yearly interest rate. This is because an extra charge is made every year on top of the interest. © moneyskool.org 2015

APR TIPS 1.If the APR is high you should be careful - you’re probably being offered a bad deal! 2.The APR is most useful when you use it to compare loans or credit which have the same repayment period. 3.As well as looking at the APR, you should always think about the total cost of your payments and the total cost of the interest when you are making a decision. Loans which have longer repayment periods cost more to pay off. © moneyskool.org 2015