How is the APR calculated?

by garret_hahn , in category: Banking and Credit , a year ago

How is the APR calculated?

Facebook Twitter LinkedIn Telegram Whatsapp

1 answer

by augustine , 10 months ago


The APR, or Annual Percentage Rate, is calculated by considering both the interest rate on a loan or credit card and any additional fees or costs associated with borrowing. The calculation involves summing up the total cost of borrowing over the course of a year and expressing it as a percentage of the loan or credit amount.

To calculate the APR, you typically follow these steps:

  1. Determine the periodic interest rate: Divide the annual interest rate by the number of periods in a year (e.g., 12 months for monthly payments).
  2. Determine the number of periods: Multiply the number of years by the number of periods in a year (e.g., 12 for monthly payments).
  3. Determine the total cost of borrowing: Take into account any additional fees, closing costs, or points associated with the loan. Add these costs to the principal loan amount.
  4. Calculate the interest for each period: Multiply the periodic interest rate by the remaining loan balance for each period.
  5. Sum up the interest payments: Add up the interest payments for all the periods.
  6. Calculate the APR: Divide the total cost of borrowing, including fees, by the loan amount and express it as a percentage.

By including the additional costs, the APR provides a more accurate measure of the true cost of borrowing, making it easier for consumers to compare different loan offers.