How are interest rates calculated?
The basic idea of APR is to inform you of how much interest you’ll pay on an annual basis over the full term of your debt. However, when rates change, this can quickly become confusing. An overview of how APR works would look a little like this:
1) You max out your credit card at £1000, and it has an APR of 10%
2) If you don’t repay anything over the course of a year, the total repayable would be £1100
As long as you make minimum repayments each month, you will end up paying less interest. Of course, the longer the period of repayment, the lower the monthly repayments will be. However, you will end up paying more interest, as the APR compounds. In simple terms, compound interest is interest on interest! It sounds confusing but it basically calculates the interest gained on the combined total sum borrowed and the interest it has already accrued.