APR Calculator

The True Cost of Bank Loans

People borrow money for various reasons. Perhaps they are using the money to start a business, repair their home, go on a dream vacation, or pay off other debts. No matter the reason, it's essential for people to evaluate the cost of taking on this additional debt carefully. Most banks are transparent about the amount of interest they charge on their loans. However, there are often additional fees that can increase the overall cost of your loan.

Example

Mark wants to borrow $50,000 from his bank to restore his classic car. The bank charges 8% interest on the loan. However, because the bank charges a $1,000 fee to take out the loan, the real APR on a 10-year loan is actually 8.457%.

Because the $1,000 is added to the loan amount, Mark is actually borrowing and paying interest on $51,000. That equates to nearly $1,500 more that will be paid by the end of the loan term. For this reason, APR (also known as real APR) is a better indicator of the total cost of the loan than just using the interest rate quoted by the bank.

Understanding the subtle difference between interest rate and APR can help borrowers save money and avoid unnecessary debt.

Understanding the General APR Formula

To calculate APR interest on a loan, you have to determine the total cost of all the fees and interest compared to the borrowed amount. This will give you the total percentage cost of the loan. Since most loans vary in duration, you will need to divide the total percentage by the number of years to find the real APR. While the calculator makes this easy, it’s a good idea to understand how the calculation works.

The formula to calculate the general APR of a loan is:

$$APR = \frac{(I + F) / P}{N}$$

• APR = Real APR of the loan
• I = Total interest
• F = Additional fees
• P = Initial loan amount or principal
• N = Number of years

Note: This calculation returns the APR in a decimal format. To convert to a whole number, multiply the number by 100.

Mortgage APR

The formula above applies to most types of loans. However, the terminology used to calculate a mortgage's real APR may vary. The primary difference is the terminology used. For example, the total loan amount will be the home's value (plus any closing costs, commissions, etc.) minus any downpayments.

Some mortgages also factor in special points you purchase when securing your loan. These points are a way to prepay some interest in exchange for a lower interest rate over the life of the loan. These points can alter your overall real APR.

How to Use the APR Calculator

Using our online APR calculator will require a few data points. Most of this information can be provided by your bank or other financial institution providing the loan. Fees vary by lender but typically range from 1 to 3 percent.

• Step 1: Select the type of APR you are interested in calculating. Our calculator provides fields for calculating the APR for both general loans and mortgages. Unless you are calculating the APR on a mortgage, you should use the first calculator fields.
• Step 2: Complete the information. Provide the amount being borrowed, interest rate, and loan term. Try not to make assumptions and keep the information as accurate as possible.
• Step 3: Click “Calculate” and review the results. Each calculator returns similar results, including a breakdown of the total cost of the loan, monthly payment, total interest paid, and real APR percentage. You can also see a graph that displays the percentage of the loan applied to principal, interest, and fees.

Real Example

Let’s say you want to take out a loan to remodel your kitchen. The general contractor has quoted $125,000 for the project. Your bank has offered you a 5-year loan at 5% interest. They charge a $250 administration fee added to the loan and an upfront fee of $500. You want to calculate what the real interest rate will be after factoring in the additional fees.

To run this calculation, enter the following values into the general APR loan calculator:

• Loan Amount: $125,000
• Loan Term: 5 years and 0 months
• Interest Rate: 5%
• Compound: Monthly (APR)
• Pay Back: Every Month
• Loan Fees: $250
• Upfront Fees: $500

Once you hit the Calculate button, you’ll see that despite being quoted a 5% interest rate by your bank, your real APR is actually 5.248%.

Key Benefits and Helpful Tips

Depending on your financial situation, taking on debt can be risky. Your goal should be to minimize the amount of interest you need to pay. Here are some helpful tips and benefits of using our APR calculator and saving a lot of money on interest.

Key Benefits:

• No Memorizing Formulas - Calculating the APR on loans gets very complicated. With our APR calculator, you can determine the real APR in minutes. You can feel confident that the information is accurate without remembering how to calculate APR on a loan.
• Compare Multiple Loans - Since interest rates and fees vary, comparing the loans from different financial institutions can be difficult. The real APR calculation provides the user with an accurate total comparison between each loan.

Helpful Tips:

• Run Scenarios - The APR calculator helps users see how the APR changes with minor adjustments to the loan details. For example, adjusting the loan term can increase or decrease the total APR.
• Shop Around - Many borrowers select loans based solely on their interest rate. However, it’s possible that a higher interest rate loan could have a more favorable APR if the loan fees are lower. Be sure to shop around to find the loan with the lowest total cost.