# 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.

### 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.