How Do You Calculate APR?

Written by fahlen brown
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How Do You Calculate APR?
Understanding APR is essential in managing your loan payments. (Photos.com/Photos.com/Getty Images)

APR stands for annual percentage rate. It is a calculation that determines the annual interest you will pay on a loan or a line of credit. Knowing how to calculate APR is a useful skill that can help you determine the amount of interest you will pay. APR is determined by the amount and the terms of your loan. You may calculate the interest either manually or with a free online APR calculator.

Skill level:
Moderate

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Things you need

  • Calculator
  • Free APR online calculator

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Instructions

  1. 1

    Educate yourself about APR. Know the basics such as APR being interest that is applied yearly to loans for cars, mortgages and lines of credit.

  2. 2

    Know the terms of your loan. For instance, a loan with a 6 per cent APR means that you will pay £3 each year for every £65 you owe.

  3. 3

    Use a free online calculator to determine the APR of your loan. According to the Efunda APR calculator, a £13,000 loan with a 6 per cent APR, no extra costs and a 12-month loan term will have £426.3 in total interest. The total amount paid on the loan when the term ends will be £13,426.3.

  4. 4

    Use the APR equation to calculate the APR of your loan. Using the above loan example, multiply the loan amount ($20,000) by the interest rate (6 per cent). Divide that amount by the term of the loan (12 months) to calculate the monthly APR amount. Your equation should look like this: (20,000 x 0.06) / 12 = £65 APR.

Tips and warnings

  • Use an online APR calculator to double-check your numbers.

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