APR Calculation: A Simple Guide to Annual Interest Rates

To calculate the annual percentage rate, or APR, on a loan, the lender or borrower must know the length of the loan and the number of payments to be made over the period of the loan. Note the amount of each payment. Apply a simple formula to those figures for the APR. Note that on some loans the APR can be lower than the effective interest rate because of compounding.

Step 1

Use the example of a $100,000 loan for 30 years with payments of $700 a month. Multiply the monthly payment, $700, by the number of monthly payments over the life of the loan, or 360 for the 30-year period. The answer is $252,000, the total paid over the life of the loan.

Step 2

Divide that total, $252,000, by the original amount of the loan, $100,000. The answer is 2.52. Move the decimal point two places to the right to covert that number to a percentage. In this case, it's 252 percent over the life of the loan.

Step 3

Divide 252 percent by the number of years in the loan, in this case 30. The answer is 8.4 percent in this example, which is the annual percentage rate, or APR.

Step 4

Understand paying points. On many mortgages, the buyer will also pay "points" up front. For example, the buyer may have paid three points, or 3 percent of the $100,000, for $3,000. To get the APR, add the $3,000 to the original loan amount of $100,000, making it $103,000. Repeat the process above.

Tip

In the case of bank deposits, credit card and some other loans, the interest is calculated semi-annually or monthly on the balance. That compounds the effective interest rate, making it higher than the APR.

Things You'll Need

• Calculator

• Amount of the loan

• Length of the loan

• Number of payments per year

• Amount of the payments