How to Calculate Annual Percentage Rate (APR)

Overview, Calculate by Hand or With Spreadsheets

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Annual Percentage Rate (APR) is a tool for understanding the cost of a loan, whether it's a credit card or a mortgage. Although APR is not perfect, it gives you a nice standard for comparing interest and fees from different lenders.

What makes APR so special? It includes fees – not just interest charges – so that you can better understand the costs of a loan. To use it properly, it’s essential to understand how it works.

In many cases, your lender provides an APR, but you might need to calculate APR yourself (or you might just want to check their math).

The Value of APR

Loans can be confusing. Slick lenders quote a lot of different numbers that mean different things. They might include certain costs that you're likely to pay, or they might conveniently omit those costs in advertisements and brochures.

Sometimes you’ll get completely transparent quotes from honest lenders, but you still can’t tell which one is least expensive (because the interest rates and fees are different).

APR helps you (more or less) get an apples-to-apples comparison of loans by accounting for all of the costs related to borrowing.

If you just want an APR calculation without all of the math, use our online APR calculator.

What is APR?

APR allows you to evaluate the cost of the loan in terms of a percentage. If your loan has a 10% rate, you’ll pay $10 per $100 you borrow annually.

All other things being equal, you simply want the loan with the lowest APR.

How to Calculate APR

Calculating APR can be tricky, but there are several ways to do it:

  • Calculate with spreadsheets like Microsoft Excel or Google Sheets
  • Calculate by hand

Either way, it’s a two-step process:

  1. Solve for the monthly payment
  1. Calculate the rate, using the payment you just calculated and your “amount financed”

Example: you will borrow $100,000 at a 7% interest rate using a 30 year fixed rate mortgage . You will pay $1,000 in closing costs. The APR is 7.10%.

With a spreadsheet (Microsoft Excel and Google Sheets in particular), built-in functions do most of the work for you. Calculating the monthly payment is not difficult by hand, but solving for the rate is best done with a computer of some kind. You'll just need to convert the interest rate from percentage to decimal format.

Step 1: Find the monthly payment for your loan:

=PMT(0.07/12,360,100000)

The format is: PMT(rate,nper,pv,fv,type)

  • .07 divided by 12 is the rate (you’re using a monthly rate to find monthly payments)
  • 360 is the number of periods (payments or months – 30 years here)
  • 100,000 is the present value of your loan (including additional costs)

You should have a result of $665.30.

Next, Solve for the APR:

=RATE(360,-665.30,99000)

The format is: RATE(nper,pmt,pv,fv,type,guess)

  • 360 is the number of periods you pay on the loan (360 months or 30 years)
  • - 665.30 is your payment
  • 99,000 is the present value of your loan (how much you’re actually borrowing)

You should have a result of .592%. This is still a monthly rate. Multiply by 12 to get 7.0999 APR%.

Why is the loan amount smaller in the third bullet point above? We need to calculate the rate for this step using a decreased loan balance of $99,000 (the $100,000 "loan" minus the $1,000 in fees required to get that loan).

Calculate APR on Payday Loans

Payday loans are notoriously expensive. These short-term loans might appear to have relatively low rates, but the fees make them problematic. Sometimes even the fees don’t seem terrible when you’re in a bind: you might gladly pay $15 to get cash quickly in an emergency. However, when you look at these costs in terms of an annual percentage rate, you’ll probably find that there are better ways to borrow.

Example: you’ll get a payday loan for $500, and you pay a fee of $50. The loan must be repaid within 14 days. What is the APR?

The Consumer Federation of America explains how to calculate the APR on a short-term payday loan:

  1. Divide the finance charge by the loan amount
  2. Multiply the result by 365
  3. Divide the result by the term of the loan
  4. Multiply the result by 100

To solve for the example above:

  1. $50 divided by $500 equals .01
  2. .01 multiplied by 365 equals 36.5
  3. 36.5 divided by 14 equals 2.6071 (this is your APR in decimal format)
  4. 2.6071 multiplied by 100 equals 260.71% APR

Finer Points

You need to know a few important things about using APR.

With credit cards, APR tells you what interest rate you pay, but it doesn’t include the effects of compounding – so you almost always pay more than the quoted APR. If you only make small (or minimum) payments on your credit card, you’ll start paying interest not only on the money you borrowed, but you’ll also pay interest on the interest that was previously charged to you. This compounding effect can raise your cost of borrowing higher than you might think. Instead of looking at the APR, APY would be a more accurate description of how much you pay. This might also be referred to as an effective annual rate.

In addition, APR for credit cards only includes interest costs - it doesn’t account for the other fees you pay to your credit card company, so you have to research and compare those costs separately. Annual fees, balance transfer fees, and other charges can add up. A card with a slightly higher APR might be better in some cases (depending on how you use your card). In addition, your credit card might have several different APRs, so you pay different rates for different types of transactions.

With mortgage loans, APR is complicated because it does include more than just your interest charges. Any quotes you get might or might not include closing costs that you’ll have to pay or other payments required to get your loan approved (such as private mortgage insurance). Lenders have the ability to choose whether or not certain items are part of the APR calculation, so you have to look closely if you’re comparing loans.

You can’t simply rely on an APR quote to evaluate a loan. You need to look at each and every charge related to your loan to determine if you’re getting a good deal. If you’re comparing lenders, take note of which charges have been included in the quote.

In addition, look at the bigger picture – you need to know how long you’ll be using a loan to make the best decision. For example, one-time charges up-front may drive up your actual cost on a loan – but the APR calculation will assume those charges are spread out over a longer lifetime (and therefore the APR would look lower). If you're going to pay a loan off quickly, APR tends to underestimate the impact of up-front costs.

For more discussion, see Get the Wrong Loan by Comparing APR.

As you compare loans, you might hear additional terms, such as variable APR and 0% APR. To learn more about different types of loans, see What does APR Mean?

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