What Is APR and How to Calculate APR?

If you are applying for a credit card, a mortgage loan, or a personal loan, you will be coming across the term “annual percentage rate (APR)” very often. Your APR is the interest you pay throughout your loan term on the borrowed amount. 

A lender decides your APR based on your risk profile, your credit score, and the type of loan you’re taking out. Although it is pretty simple to understand how APR works, knowing how to calculate APR according to your specific credit profile can help you get the best APR.

So what is APR and how is APR calculated? In this comprehensive guide, we will explain what APR is and how it is calculated for a loan and a credit card. So read on.

What Is APR? Everything You Need to Know

The annual percentage rate (APR) is the annual interest that is charged to borrowers and is calculated by a sum. It is the yearly cost of the money you borrow over your loan term, expressed in percentage. 

Your APR includes the interest as well as the standard fees. It is the total cost of borrowing money that you have to pay every month, on top of your monthly payments. These monthly payments remain for every month, especially if you’re taking out a personal loan.

Your APR is expressed as a percentage and does not include compounding interest. It is a bottom-line figure that borrowers can use to compare offers with other lenders. 

How to Calculate APR On a Loan?

If you are comparing multiple loan offers and want to calculate your APR, it is pretty simple. 

Follow these steps to calculate the APR on your loan:

1. Calculate the interest charges

If your loan uses simple interest, use the simple interest method to calculate the total interest charges.
To do so, multiply the principal amount with the interest rate and the number of years in the loan term.

2. Add finance charges

Now add your loan’s finance charges to the figure you get from the above calculation.

3. Divide by the principal balance

Now divide the result by your principal balance.

4. Divide by the number of days in the entire term

Next, divide the result you get from the previous calculation by the number of days in your entire loan term. For instance, if the loan term is of 3 years, the number of days will be 1,095.

5. Multiply by 365 and then by 100

Now calculate the annual rate by multiplying the number you get from the previous calculation by 365 and then by 100 to get a percentage annual rate.

How to Calculate APR On a Credit Card?

The credit card issuer determines the APR of credit cards. It is usually the same as the market interest rate for credit cards and is affected by your credit score. So when calculating the APR on a credit card, your credit profile will play a key role.

To calculate the APR on your credit card, follow these steps:

1. Find the daily rate

To find out the daily rate, divide the APR by 365. For instance, if your card has an APR of 20%, your daily rate will be 0.05%.

2. Calculate the average daily balance

Now calculate the average daily balance by adding the credit card balance from every day in the billing cycle and then dividing that sum by the number of days in the billing cycle.

3. Multiply the daily rate by the average daily balance

Now multiply the daily rate by the average daily balance.

4. Multiply the result by the number of days in one billing cycle

Finally, multiply the result from the previous calculation by the number of days in a billing cycle. This cycle can be between 28 to 31 days. Check your credit card statement or agreement to find the exact number of days in your billing cycle.

Do note that you won’t be required to pay any interest on new transactions if you pay off your balance within the due date every month.

Bottom Line

Now that you know what APR is and how it is calculated, you can make the best loan decision by comparing APRs from various lenders. Make sure to shop around and get various loan offers from multiple lenders to get the best APR and lowest APR possible.

If you are looking for a personal loan in Utah with the most affordable APR, apply now at Cash in Minutes. With the most competitive rates in the market and same-day funding, we are the leading personal loan provider in Utah.