The annual percentage rate (APR) of a loan is the interest you pay each year represented as a percentage of the loan balance. For example, if your loan has a 10% APR, you would pay $100 annually for every $1,000 borrowed. All things being equal, the loan with the lowest APR is usually the least expensive, but it’s usually more complicated than that.
Although ABR is not perfect, it does provide a useful starting point for comparing interest and fees from different lenders.
For quick APR calculations, create a spreadsheet with the appropriate formulas or download an existing spreadsheet and adjust it to your needs.
Understanding APRs
APRs include fees in addition to interest and convert those fees to an annualized cost. Understanding how APRs work helps you better understand the full cost of loans.
Don’t assume that the lender with the lowest interest rate is the least expensive option. Calculate your APR, which includes all associated fees, to help you identify the best deal.
Lenders often quote different numbers that mean different things. Some may quote interest rates without including additional fees in their listings, while others may list everything upfront. Even with honest and completely transparent lenders, it can still be difficult to determine which loan is the least expensive. APRs help you get an apples-to-apples loan comparison by accounting for all loan-related costs.
Calculate monthly payment
The first step in calculating your APR is to calculate your monthly payment amount ( pages ) using the principal balance or total loan amount ( a ), periodic interest rate ( r ), which is your annual rate divided by the number of pay periods and your total number of pay periods ( n ):
- Formula: a / {[(1 + r) ^ n] -1} / [r (1 + r) ^ n] = p
Let’s say you borrow $100,000 at an interest rate of 7% using a 30-year term. fixed rate mortgage . To calculate the monthly payment, convert percentages to decimal format , then follow the formula:
- one: 100,000, the amount of the loan
- r: 0.00583 (7% annual rate, expressed as 0.07, divided by 12 monthly payments per year)
- north: 360 (12 monthly payments per year for 30 years)
- Calculation: 100,000 / {[(1 + 0.00583)^360] -1} / [0.00583 (1 + 0.00583)^360] = 665.30, or 100,000 / 150.3081 = 665.30
The monthly payment is $665.30. Check your math with an online payment calculator.
Microsoft Excel and Google Sheets, among others, provide built-in functions that do most of the work for you. In Excel, for example, you can calculate your monthly payment by typing the following formula in a cell:
- = PMT (rate/number of annual payments, total number of payments, loan amount)
For the example above, the formula would look like this:
- = PMT (0.07 / 12, 360, 100000)
Calculate your APR
Following the same example, use the monthly payment you calculated plus any initial fees accrued on the $100,000 you borrowed to calculate your APR. If $1,000 of the amount borrowed was used for closing costs, the value of the loan is $99,000, and that is the amount used to calculate the APR.
Again, spreadsheets like Excel make this calculation easy. Just type the following formula in a cell:
- = RATE (total number of payments, monthly payment, loan value)
For this example, the formula would look like this:
- =RATE(360, -665.30, 99000)
Please note that the monthly payment is represented as a negative number based on the above calculation used to determine the amount.
You should get a result of 0.5917%. This is still a monthly fee, so multiply it by 12 to get 7.0999%, which is your APR.
Calculate your APR on payday loans
Payday Loans It may seem like it has relatively low rates, but the fees generally make the overall cost of loans quite high. Sometimes the changes don’t seem terrible. You can gladly pay $15 to get quick cash in an emergency, for example. However, when you look at these costs in terms of an APR, you may find that there are less expensive ways to borrow.
For example, a $500 payday loan that is due within 14 days with a $50 fee has an APR of 260.71%. The Consumer Federation of America explains how to calculate it:
- Divide the finance charge by the loan amount. In this case, $50 divided by $500 equals 0.1.
- Multiply the result by 365 to get 36.5.
- Divide the result by the term of the loan. In this case, 36.5 divided by 14 is 2.6071.
- Multiply the result by 100 to convert the answer to a percentage: 260.71%.
APR on credit cards
With credit cards, your APR tells you that you’re paying interest, but it doesn’t include the effects of compounding interest, so you almost always pay more than the quoted APR.
If you have a balance on your credit card, you pay interest on the money borrowed and on the interest that has already accrued. This compounding effect makes your cost of borrowing higher than you might think.
The APR for credit cards includes interest costs, but not the other fees you pay to your credit card issuer, so you should research and compare those fees separately. Annual fees, balance transfer fees, and other charges may add. As a result, a card with a slightly higher APR might be better, depending on how you use your card. Also, your credit card may have different APRs for different types of transactions.
APR and home loans
With mortgages, the APR is complicated because it includes more than just your interest. Any quote you get may or may not include closing costs you have to pay. In addition, you may be required to make additional payments to qualify for the loan, such as private mortgage insurance. Lenders can choose whether or not certain items are part of the APR calculation, so think carefully about how to do your own calculations.
It’s also important to know how long you’ll hold a loan to make the best decision. For example, one-time fees and upfront costs may increase your immediate costs to borrow, but the APR calculation assumes you spread those fees out over the full term of your loan. . As a result, the annual percentage rate appears lower on long-term loans. If you plan to pay off a loan quickly, APR often underestimates the impact of up-front costs.
