How to Calculate APR: A Complete Guide

October 1, 2019 by  
Filed under Credit score, Resources

credit cards and a summary on how to calculate apr

Image from Pixabay

When building or rebuilding credit, many people turn to credit cards and loans to help establish their credit history and raise their credit score. When considering these credit vehicles, you will want to know how to calculate APR in order to determine if you can make your payments and decide which cards or loans are the best for your situation.

What Is APR?

Insert Video
Insert Video

Whenever you borrow money, you will have to pay a cost for borrowing that money. This cost is referred to as the annual percentage rate, or APR. This rate is a percentage of the money you have borrowed. The APR is how the bank, mortgage company or credit card company can afford to offer money on credit. In order to make enough money to be worthwhile, banks must charge higher interest rates for riskier clients. If you have a low credit score or no credit history, you will often have to agree to higher APRs than people with better credit scores and longer credit histories.

APRS AND COMPOUND INTEREST

It is vital to understand compounding interest when learning how to calculate APR. Any time you borrow money, you won’t only pay interest on the money you borrowed. You will also pay interest on your interest. APR is compounded based on your daily or monthly balances. It is most often compounded daily and added at the end of the billing cycle to the balance of your loan or credit card. For example, if you make $1000 in purchases on a new card with a 15% APR, every day a portion of that 15% APR gets added to your balance. If your interest is compounded daily, after a year, you will have about $160 of interest due on the balance if no payments are made to the principal or balance.

When figuring out how to calculate APR, it helps to understand the differences between the various types of loan APRs and credit card APRs that you might encounter. The differences between these will affect how to calculate APR and how much money you could end up paying to use the loan or credit card.

Types of Loan APRs

Loans are an important tool and a necessity for almost every working adult. However, not all loan APRs are created equally. Sometimes, the 3% interest rate on one type of loan, such as a variable loan, will cost more in reality than a 5% interest rate loan that is a fixed rate. You must take these types of loans and rates into account as you figure out how to calculate APR.

FIXED APR

VARIABLE APR

TIERED APR

Types of Credit Card APRs

Most American adults will carry some credit card balance. Any time you carry your balance over to a new month, a portion of your APR is added to the balance. You must pay the interest or it becomes a part of your new balance as time goes on.

INTRODUCTORY APR

BALANCE TRANSFER APR

PURCHASE APR

CASH ADVANCE APR

PENALTY APR

How to Calculate APR

Depending on what you want to figure out about your APR, there are a few different ways to calculate your APR. We highly recommend using online calculators and Excel formulas to calculate your APR and the compounded interest. If you are determined to do the calculations yourself, you can find the formula below.

​ONLINE CALCULATORS

​EXCEL FORMULAS

​HOW TO CALCULATE APR WITH COMPOUND INTEREST

Conclusion

It is important to learn how to calculate APR so that you can figure out your effective APR, including compounding interest. There are a few different ways to calculate your APR and some variations depending on what in particular you want to solve for. Thanks to technology, it’s easier than ever to quickly figure out your effective APR with online calculators and Excel spreadsheets. Knowledge is power, and if you know how much it will cost you to borrow money, you have the power to make the best decisions to improve your finances and your credit score.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!