Understanding and Calculating the Interest Rate Factor

How to Calculate an Interest Rate Factor

1. Calculator

Tip

The interest rate factor helps break down the APR, but it doesn't tell you that much other than a lower APR equals a lower interest rate factor, which means less money you have to pay in interest on your loan.

Nothing is free, not even money. Whenever you use a credit card or take out a loan for a car or house, you borrow money, and interest is what you pay to borrow. The Interest Rate Factor is your daily interest on your loan, and it is important to know how to calculate that factor.

Step 1

Look up the loan interest rate.

Step 2

Divide the interest rate by 365.25 (days in a year) to find the interest rate factor.

Step 3

Calculate an example. If your interest rate (APR) is 6.2 percent, first convert it to decimals: .062.

Step 4

Divide .062 by 365.25. The interest rate factor is .00016974.

Step 5

Learn how the interest rate factor relates to APR. Since the interest rate factor is the daily interest rate accruing on your loan, your APR or Annual Percentage Rate is equal to the Interest Rate Factor multiplied by the number of days in the year. You can also determine your monthly interest rate by multiplying the interest rate factor by the number of days in a month.