• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

APR and Flat rate

Y

yingbei

Member
loan is £5000, flat interest rate is 10%, and repaid at the end of each of the next of 12 months

explain why the effective annual interest rate is roughly twice that flat rate of interest?

i understand why effective annual interest rate is higher than flat rate of interest, but why its twice, and the explaination in the material mentioned average amount borrowed,£2500, is it something to do with statistics again??? and finally it used total interest payments divided by the average loan outstanding 500/2500=20%.

and why the average amount borrowed is the average loan outstanding ??

confusing ....
 
If you borrow 5000, and repay it fairly evenly over the year, so that you don't owe anything at the end of the year, then over the course of the year will be be borrowing roughly 2,500, on average (5000 + 0) / 2.

"Loan outstanding" is just another way of saying "amount borrowed" or "amount you owe" at any point in time. So averahe amount borrowed = average amount outstanding. So in this case we're paying 500 interest on a loan of 2500 on average. Hence true interest rate is around 20%.
 
You must log in or register to reply here.
Back
Top