Annual percentage rate facts for kids
The term annual percentage rate (APR), also called nominal APR, and the term effective APR, means the interest rate for a whole year, rather than just a monthly fee/rate, as applied on a loan, mortgage loan, or credit card. This rate is useful when buying a car, a house, or any other expensive possession. Since few people are able to afford to pay the full price, many sellers choose to divide the price into monthly payments and a down payment. This makes things easier to buy. Once the buyer pays the down payment, he or she enters into an agreement to pay the remaining months. But since the buyer has not paid the entire amount yet, the seller is essentially lending part of the purchase to the buyer. This is where interest rates come in. The seller charges the monthly payments with a part or a percentage of the remaining amount. This amount gets added onto the monthly payment. Some companies force the buyer to pay the interest first, and the remaining amount pays the original loaned amount, called the principal.
Annual percentage rate Facts for Kids. Kiddle Encyclopedia.