DISCOVER

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How is APR calculated? Hi, I'm Jimmy Chang and I've been teaching college math for almost a decade and we're here to discuss what APR is and what is involved in calculating that number. Now APR stands for annual percentage rate. It is often confused with interest rate which we'll discuss a little bit later on, but it is something that by law folks such as automobile dealers, credit card companies have to provide you and part of Congress' truth and lending act so legally they have to provide you with what the annual percentage rate is. Now, what is that? Well there's actually a couple of things that are involved. Number one, there is the add on interest rate which is denoted R and that involves taking a certain percentage of how much you're going to be financing whether you're buying a car or a home, but what's also involved is the number of payments. And over here we have the APR formula. As you can tell, there's two letters that are involved, capital N which is the number of payments that you want to make, and R which is the add on interest rate. Again it's a kind of rate that they take as a percentage of how much you're actually financing. So as a result there's going to be finance charges involved. Now in APR, you can find out on credit card statements very easily. When it comes to mortgages it's a little more involved but luckily for us there are a lot of resources out there on the internet, periodicals, what have you, that will describe how APR can be calculated. What they generally need from you are how many payments and what the add on interest rate happens to be, what finance charges are but once you figure out those basic numbers, you can actually enter them into the APR calculation websites and they should be able to tell you exactly how the APR is calculated. So, you can use this formula or other resources out on the web there, and my name is Jimmy Chang and that is exactly how you calculate APR.