Learn How to Calculate the APR
The cost of credit is not as easy as simply knowing the interest rate. Knowing how to calculate the APR will place you in a better position to choose the appropriate credit for your needs.
What is an Annual Percentage Rate (APR)?
The Annual Percentage Rate (APR) is the cost of credit (actual interest rate) measured on a yearly basis and is expressed as a yearly rate percentage. The APR reflects not only the interest rate but also the fees that you have to pay to get the loan. Unlike a traditional interest rate, the APR is a broader percentage that's more reflective of the total cost you will owe.
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APR vs. Interest Rate
- The interest rate is the percentage of a loan amount that you're charged to borrow money.
- The APR includes other additional costs that are part of the loan (annual fees, initial fees, etc.) and calculates them as a yearly percentage of the loan amount. Because of this, APR is a more accurate representation of the true cost of a loan.
How to Calculate APR
Here’s how to calculate the APR:
On credit card billing statements, the interest is expressed in two ways, as a Periodic Rate (monthly or daily) and as an Annual Percentage rate. The monthly periodic rate is the annual percentage rate divided by 12.
APR Calculation Example
The example below shows how the APR affects the cost of credit.
Calculate Monthly Periodic Rate on a yearly APR of 18%:
APR (18%) ÷ Months in the Year (12) = 1.5%
Calculate the Monthly Interest Rate using a Monthly Periodic Rate:
Average Daily Balance ($100) x Monthly Periodic Rate (1.5) = Monthly Interest Rate ($1.50)
Calculate the Daily Periodic Rate:
APR (18) ÷ Days in the Year (365) = Daily Periodic Rate (.05)
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Published Apr 24, 2009.