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Financial Literacy

Financial Literacy

"Rent" Money

It goes like this: 

• Interest is what you pay to borrow money.
• What you pay is based on the amount you borrow.
• You borrow $1,000.
• The interest rate the bank’s going to charge is 10%.
• You pay $100 a year to use that $1,000.

This interest rate is called the Annualized Percentage Rate (APR). It’s splashed everywhere on credit card ads: 0% APR…low APR…12.99% APR! It’s the rate that people use to compare credit cards. But it understates the rate you’ll actually wind up paying. That real rate—the effective APR—is always a little higher because credit card companies calculate interest monthly and the APR is based on calculating interest annually, or just once a year.

Nominal APREffective APR
Annualized rate18.0%19.6%
Divided by 12 months1212
Monthly rate1.50%1.63%
Monthly payment$15.00$16.30
Interest you pay in a year$180.00$195.62

There are dozens of different rates and reasons why those rates are higher or lower for a given person. For more interest info, go here.

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