When you take out a loan, your lender charges you interest to use the money. The interest rates don’t tell the full story, however, because many loans — like car loans, mortgages, and payday loans — have finance charges or closing costs in addition to interest. The annual percentage rate accounts for any finance charges and interest to measure the true cost of borrowing. Here’s what you need to know about how to calculate interest APR.
What Is APR?
APR includes the interest rate plus points, closing costs, and other fees. When you apply for a loan, one lender might offer you an interest rate of 3 percent while another offers 3.25 percent. If you look at just the interest rate, the first lender wins. If the first lender charges you $8,000 in closing costs, and the second charges $1,000, however, then the second lender is the better option. The APR will take that into account.
How to Calculate APR
Calculating APR is straightforward when you have the correct formulas in place. Here’s how to calculate APR for different kinds of borrowing situations.
How to Calculate APR for a Payday Loan
Here’s how to calculate the APR on a payday loan, or any other loan with a single repayment:
- Take the cost of the loan in interest and finance charges and divide it by the amount borrowed or current balance.
- Multiply that number by 365.
- Divide the sum by the term of the loan in days.
Example: A $500 payday loan with $60 in fees for 14 days:
- $60 ÷ $500 = 0.12
- Then 0.12 x 365 = 43.8
- Then 43.8 ÷ 14 = 3.1286% APR
Find Out: Why Payday Loans Are Dangerous
How to Calculate APR for an Installment Loan
Here’s how to calculate the APR on an installment loan:
- Multiply the monthly payment by the term of the loan in months to get the total payment.
- Subtract the amount borrowed from the total payment to get total interest.
- Divide the total interest amount by the number of years on the loan to get the yearly interest amount.
- Divide the yearly interest amount by the total payments to get the APR.
Example: A $16,000 loan for five years — or 60 months — with a $400 monthly payment:
- $400 x 60 = $24,000
- Then $24,000 – $16,000 = $8,000
- Then $8,000 ÷ 5 = $1,600
- Then $1,600 ÷ $24,000 = 0.0667% APR
How to Calculate APR for Home, Auto and Personal Loans
Calculating the APR on loans with closing costs, finance charges, interest, and monthly payments over the life of the loan can be more complex. Using a Microsoft Excel spreadsheet will help; here’s how to calculate APR for home, auto and personal loans using Excel 2013:
- In cell A1, enter the total period of the loan in months.
- In cell A2, enter the following formula to get your monthly payment amount, using your actual numbers: =PMT(interest rate/months, total months, loan amount plus fees).
- In cell A3, enter the total amount of the loan.
- In cell A4, enter 0, as in the zero balance you’ll have when the loan is paid in full.
- In cell A5, use the following formula: =RATE(A1,A2,A3,A4)*12
- Right-click cell A5, select “Format Cells…” then select “Percentage,” and select two decimal places to display the number as a percentage.
See the following example and try it yourself in Excel 2013. Calculations are for a $100,000 loan at 8 percent interest for 15 years — or 180 months — with a closing fee of $1000:
- Enter 180, the total period of loan in months, in cell A1.
- Enter this formula into cell A2 to get the monthly payment: =PMT(0.08/12,180,101000). The result is -965.21.
- Enter 100,000, the total amount of loan financed, in cell A3.
- Enter 0, for the zero balance that will occur when the loan is paid in full, in cell A4.
- Enter this formula into cell A5 to get the annual percentage rate: =RATE(A1,A2,A3,A4)*12. The result is 0.081651165.
- Right-click cell A5, select “Format Cells…” then select “Percentage,” and select two decimal places to display the number as a percentage: 8.17. Your APR is 8.17 percent.
How to Calculate Credit Card APR
The APR for credit cards doesn’t account for compounding interest. Credit card APR is often variable and changes as the interest rate changes. Banks don’t have to notify you when credit card rates increase due to an increase in the federal rate.
Related: Choose the Right Credit Card for You
Credit card APR is the U.S. prime rate plus the interest rate or margin the bank charges. For example, if the U.S. prime rate is 3.25 percent and the bank’s credit card interest rate is 5 percent, the credit card interest rate for the consumer will be 3.25 + 5 = 8.25% APR.
You should monitor the APR for loans that have an interest rate that fluctuates with the market, such as lines of credit or credit cards, to know what you are paying in total interest and how long it will take you to pay off the loan.
David Navarro contributed to the reporting for this article.