How to Calculate APR
A quick and easy guide on how to calculate APR for a home or car loan, as well as on a credit card. Show transcript Hide transcript
Transcript: How to Calculate APR
Hi, I'm Kaytie Sproul, here for About.com, and today I'm going to show you how to calculate an annual percentage rate, or APR.
What's an APR?
An APR is the effective total cost of borrowing, including your interest, fees, closing costs, and the like. Let's take a look at how to calculate it in a few different situations. The biggest purchase most of us will make in our lifetimes is a house. However, with the number of loan options out there, it can be hard to pin down the correct APR formula.
Your best bet is to find an online calculator for your specific loan, whether it be a fixed or variable rate, and go from there. Using this calculator on About.com's Banking and Loans site, let's assume you have a fixed rate mortgage with a loan amount of $250,000, an interest rate of 6.25 percent, a term of 360 months, and total closing costs of $5,000. After plugging all those figures in, we hit calculate, and find that the APR for this particular loan is roughly 6.44 percent.
Instructions for How to Calculate APR
Since most of us will need financing for an automobile at some point, it's a good idea to understand one of the ways APR can be calculated for this type of loan. This is one standardized equation for calculating APR: where lower-case n equals the number of payments in one year;
I equals the total financing charges; P is the amount borrowed; and capital N equals the number of scheduled payments. Let's assume that you'll be making 12 payments per year, your total financing charges are $1,100, you're borrowing $15,000, and the number of scheduled payments over the life of the loan is 48. Plugging these figures into our equation, you'll find that the APR on this particular $15,000 loan is 3.59 percent. However, when it comes to car financing, it's important to note that most lenders use their own formulas and criteria for establishing rates.
Finally, let's take a look at how to calculate the APR of a credit card. It's a little different than calculating APR for say a home or car loan, because credit card rates are calculated on a daily term. You first want to grab your credit card statement and scan the bottom of it for the Average Daily Periodic Rate. Once you find this figure, you want to multiply it by the number of days in a year, so 365. For this example, let's assume that your credit card's Average Daily Periodic Rate is .05751. You'll now multiply .05751 and the number of days in a year, 365, to find that your credit card's APR is 20.99 percent. While the Federal Truth in Lending Act requires all lenders to accurately quote the APR on any loan you may be taking out, it's helpful to know how to calculate it yourself.
Thanks for watching. To learn more, visit us on the web at About.com.