How to Calculate APR Formula

Several fees are included in the cost of borrowing.

Most loans are expressed as an APR, or annual percentage rate. An APR is the effective total cost of borrowing and includes all interest, fees and points paid. The actual APR of a loan can sometimes be much higher than the interest rate the loan is advertised with.

Instructions

1. Gather the loan amount, interest rate and loan term for the APR you're trying to calculate. If any variables in the formula change, you will need to recalculate the APR.

2. Determine the other fees and costs associated with the loan. Home mortgages typically have closing costs, application fees, points and documentation fees that must be paid as part of the loan package. Total these costs to determine the non-interest cost of borrowing.

3. Plug all the data from Steps 1 and 2 into an APR calculator (see Resources). The APR calculator software will use a financial formula to discount the loan and compute the actual APR or true cost of borrowing. APR is the figure that you'll want to use when comparison shopping.

Tips & Warnings

• The Truth in Lending Act requires lenders to disclose actual loan APRs to you.

References

• Investopedia: APR vs APY
• Debt Consolidation Care: APR Overview

Resources

• Read this Article in Spanish
• Efunda: APR Calculator