How do you calculate apr on a loan

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By Izzy M
Modified on January 19, 2024

APR is the yearly interest amount borrowers pay to borrow money. Knowing how much an APR will cost in interest fees can help you choose the best loan offer. To calculate the total APR of a loan, you need to know the loan amount, annual percentage rate (APR), and loan repayment terms.

Once you have your data ready, you can use this calculation to find out how much your annual percentage rate will cost each month and in total: A = P {[r(1+r)n ]/ [(1+r)n-1]}.

A represents the monthly payment amount, which you are solving for. P is the total loan amount you borrow. R is the monthly interest rate you get by dividing the APR by 12 months. N represents the repayment length in months.

Before you can calculate the cost of your annual percentage rate, you need to get your monthly interest rate. Suppose you get a $5,000 loan with bad credit, a 25% APR, and a two-year repayment period. Convert your annual percentage rate to a decimal (0.25) and divide by 12. The answer is 0.0208333 or 2.0833%, which is your monthly interest rate.

Your calculation should look like this when you add in your variables: A = 5,000 [(0.0208333 x 1.020833312) / (1.020833312 – 1)].

Once you do the calculations within the parenthesis, your formula should look like A = 5,000 (0.026681/0.280731). After you complete the calculations within the brackets, your math formula should appear as A = 5,000 (0.095041). And finally, by multiplying 5,000 by 0.095041, you get 475.205!

This formula shows that the monthly payment for your installment loan is $475.21! Multiply $475.21 by 12 months to calculate the total cost of borrowing money. The answer is $5,702.52. 

This means you will end up paying $702.52 over a one-year period to borrow emergency cash.

Knowing how much an APR will ultimately cost you can help you make a confident financial decision that doesn’t negatively affect your existing budget. While bad credit scores can affect borrowing in many ways, you may still qualify for low-cost options, such as a personal  loan. Take time to compare loan offers and calculate how much you will end up paying in interest fees.

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