Total Finance Charge

Categories: Credit

See: APR. See: Total Annual Loan Cost. It's the same thing. Hidden fees make loans that sound cheap...expensive.

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Finance: What is APR?0 Views

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and finance Allah shmoop What is a P R old

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Even pirates know nothing worth anything in life is free

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But unlike in G olden days of pirate lore where

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you'd have to steal to get more money in the

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bank well you can actually rent money today For instance

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a mortgage a car loan a credit card They're all

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forms of renting money taking on debt in exchange for

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some interest in you know paying for that debt or

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renting it But setting up alone includes other costs Like

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you know when you buy a house you have to

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pay a closing costs You have to pay to be

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sure there's no mold on the wall and you have

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to pay to be sure there's a proper title to

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the house so no one claims ownership to it in

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a whole bunch of other expenses and fees that come

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in there Well somebody's got to pay those inspectors the

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title Dudes you know the home underwriters That's why we

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like a PR I annual percentage rate which takes into

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account the interests you'll be paying until the loan is

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repaid and all those other costs and fees right so

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a PR basically tries to roll in everything so that

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you get the gross cost out of your pocket not

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just one sliver of some of the costs It's going

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to take you to buy whatever it is you want

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to buy Well a PR combines all the cost the

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borrower of alone will be facing An average is them

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over The term of the loan is a percentage right

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so it grosses up the percentage to match reality But

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when you look at buying a new car house or

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a researching credit cards you'll probably notice two rates the

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A p R And the interest rate to different things

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where the interest rate is the interest you'll be paying

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on the loan on Lee will each month You make

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payments to pay the loan back with well in the

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beginning most of it being interest that you're paying And

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gradually you worked down the principal until it you know

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goes away and there's nothing really a PR shown will

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be higher because it wraps the interest rate in with

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all the other fees So you get a better idea

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of exactly how much this is really going to cost

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you Well the A p R is your best friend

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When you want to know Are these guys ripping me

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off For what When your comparison price shopping like between

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two different credit cards or mortgages while a PR will

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tell you which one will actually cost you less Overall

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if one company has lower interest rate about hire a

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PR than a number well it means there's hidden fees

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and charges all the time They're going to hit you

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for that money And yes those charges will hurt If

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a company keeps pointing to its low interest rates asked

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them for the a p r to get the real

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measure of that cost comparison right Well with mortgages in

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particular you have the option of hey those extra costs

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upfront or you can wrap some of them into the

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loan itself which means you'd be paying those fees off

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just like you're paying off the principal balance Well some

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types of loans come with lots of fees like mortgages

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like points up front all kinds of their taxi things

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and some with fewer like credit cards Like more competitive

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They're kind of simpler but whichever type alone you're signing

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up for Remember a PR is usually calculated with simple

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interest rather than compound interest Simple interest grows linearly over

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time little by little Compound interest includes interest on top

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of interest It grows a whole lot faster over time

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Well this is important to think about since some loans

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Yu's compound interest like credit cards and some use simple

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interest like mortgages Let's say you get a credit card

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with an 18% interest rate and you go hog wild

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buying rum and gold and then a tropical island the

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size of your bathroom racking up 500 grand in credit

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card debt Well that debt will grow in a calm

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pounding rate Not only do you owe interest on the

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principal amount the amount borrowed but you'll also end up

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owing Maur the interest on the interest you just haven't

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paid yet Every month your credit card company calculates how

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much you owe them in total not based on that

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500 grand you initially borrowed But on that 500 grand

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principle pull us any unpaid interest to date So let's

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just see how big compound interest is compared to simple

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interest and we're getting to the whole notion of a

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PR here Your 500 grand of credit card debt with

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18% interest It would take you over 15 years to

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pay off if you paid in aisle 7 800 bucks

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and change for months with calm pounding interest you'd end

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up paying a 6,688,000 and change Yeah you borrowed half

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a mil and ended up going over 6.5 mill If

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credit cards were simple interest like mortgages well then in

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the same situation you'd only end up paying 1,000,000 9

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That just under 2,000,000 for borrowing that half of interest

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very expensive There's a reason the bank executives have really

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nice jets So you ended up paying six point $5,000,000

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total in interest and principal with calm pounding interest and

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only one point 9,000,000 with simple interest Well when you're

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using a PR is you got to remember that number

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is using the simple interest calculation If you get a

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credit card and rack up calm pounding debt which you

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will if you don't pay it off in full every

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month well then you're gonna go a whole lot more

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money to your credit card company than the A P

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R would have had you believe when you signed up

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for it And you know about that island there Give

04:35

backs island buying maybe and

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