What Is Annual Percentage Rate (APR)?

Think about when you borrow a book from the library. If you're late returning it, you have to pay a late fee. Now imagine if you borrowed money instead, and the "late fee" was actually an extra amount you had to pay for every year you kept the money. That's kind of like what an Annual Percentage Rate (APR) is, but instead of a penalty, it's planned from the start.

APR is a percentage that tells you the total cost of borrowing money for a year. It includes not just the interest or the extra money you pay for borrowing, but also any other charges you have to pay to get the loan, like setup fees. So, if you see an APR on a loan, it gives you a way to figure out how much you'll really end up paying each year, above the amount you borrowed.

For example, if you borrow $100 and the APR is 10%, that means you’ll need to pay back $110 at the end of the year. The APR helps you compare different loans or credit offers easily. A lower APR means you pay less over the year, and a higher APR means you pay more.

It's like when you're shopping and comparing prices; the APR lets you compare how costly different loans or credits are. Just remember, APR does not consider the effect of compound interest, which is when interest is calculated on both the initial amount and the accumulated interest. So the actual cost might be a bit more if the interest compounds over the period.