0 votes
by (194k points)

There are two main ways to calculate APR, depending on whether you're given the interest rate and fees directly or need to derive them from loan terms:

1 Answer

0 votes
by (194k points)
Best answer

Method 1: Using Interest Rate and Fees

This is the most straightforward method and applies to situations where the loan agreement explicitly states the interest rate and any associated fees.

  1. Find the total finance charges: This should be listed in your loan agreement and includes the interest you'll pay over the loan term and any origination fees or other charges.

  2. Divide the total finance charges by the loan amount: This gives you a decimal value representing the cost of borrowing per dollar of the loan.

  3. Divide the result from step 2 by the number of days in the loan term: Typically, a year has 365 days, but some calculations might use 360.

  4. Multiply the result from step 3 by 100: Convert the decimal into a percentage representing the Annual Percentage Rate (APR).

Here's the formula:

APR = (Total Finance Charges / Loan Amount) / (Days in Loan Term) * 100

Method 2: Using Loan Terms (Interest Rate Not Given Directly)

If the loan agreement doesn't explicitly state the interest rate or fees but provides the following information, you can still calculate APR:

  • Loan amount
  • Monthly payment amount
  • Loan term in months

You'll need a financial calculator or an online APR calculator for this method.

  • Program the loan amount, monthly payment, and loan term into the calculator.
  • The calculator will determine the interest rate and then calculate the APR based on the formula mentioned in Method 1.

Things to Consider:

  • Not all fees associated with a loan are included in APR calculations. Look for additional fees like late payment penalties that may not be factored into the APR.
  • APR is a helpful tool for comparing loan offers, but it's not the only factor to consider. Think about factors like the total loan cost, repayment terms, and any prepayment penalties.
Welcome to How, where you can ask questions and receive answers from other members of the community.