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Ask the Experts

William Klinger

Professor of Business, Raritan Valley Community College

What is the biggest misconception people have about annual percentage rates?

Many consumers are probably unaware that the annual percentage rate, or APR, may change over time, for example, with credit cards. The interest rate on new charges might be higher than the rate on charges when the card was originally issued. That is yet another reason to pay off credit card debt.

How should consumers use APRs to compare financial products?

The average adult has a general idea of what APR stands for but not the nuances that are factored into or left out of the calculation. It works somewhat like buying meat at a grocery store and looking at the price per pound. That does not tell you everything about what you are buying, but it is one point of comparison. APR is a reasonable starting point to compare financial products, and one then needs to look closer at what is being bought.

Do you think the average adult knows what APR stands for? Do you think they know how annual percentage rates work?

Most people do not know that the annual percentage rate figure does not factor in compounding, that is, interest paid or owed on interest. For loans, the actual amount paid will be somewhat higher than the APR indicates, depending on how often interest is compounded and the length of the loan. For investments, the return will be somewhat higher than the APR, again depending on the frequency of the compounding and the length of the investment.

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