Use this calculator to determine the true annual cost of credit (APR), or solve for any single missing component—Principal, Total Cost, or Term—when the other three variables are known.
Credit Cost Calculator
Calculated Value:
Calculation Details
how to calculate credit cost Formula
The cost of credit can be measured by the Annual Percentage Rate (APR), which is based on the simple interest relationship between the total cost, the principal, and the loan term.
I = P × R × T
Where I is Total Cost, P is Principal, R is Rate (as a decimal), and T is Term in years.
R = I / (P × T)
This is the primary formula used to calculate the APR or credit cost rate.
Formula Source: Investopedia – APR | Related Concept: CFPB – APR
Variables
The calculator requires at least three of the four variables to solve for the missing one:
- Principal Amount (P): The initial amount of money borrowed or invested.
- Total Credit Cost (I): The total amount of interest and fees paid over the loan’s term.
- Loan Term in Years (T): The length of time the credit is held, expressed in years.
- Annual Percentage Rate (R): The effective annual rate of the credit cost, expressed as a percentage.
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- Effective Interest Rate Tool
What is how to calculate credit cost?
Credit cost refers to the total expense incurred by a borrower to obtain and use funds over a specified period. It is primarily measured by the Annual Percentage Rate (APR), which annualizes the fees and interest into a single, comprehensive rate. Understanding this cost is crucial for comparing different loan offers, mortgages, or credit card options.
The true cost is often more than just the simple interest charged. It may include loan origination fees, closing costs, and administrative charges. By aggregating all these expenses into the ‘Total Credit Cost’ (I), the resulting APR provides a standardized metric that allows consumers to make informed financial decisions. A lower APR generally signifies a lower credit cost.
How to Calculate Credit Cost (Example)
Let’s assume you borrow $20,000 (P) for a term of 4 years (T), and the total cost (interest plus fees) you will pay is $4,800 (I). We want to find the APR (R).
- Identify known variables: P = $20,000, I = $4,800, T = 4 years.
- Select the formula: Since we are solving for R, we use $R = I / (P \times T)$.
- Calculate the denominator: $P \times T = 20,000 \times 4 = 80,000$.
- Perform the division: $R = 4,800 / 80,000 = 0.06$.
- Convert to percentage: $0.06 \times 100 = 6.0\%$.
- Result: The Annual Percentage Rate (APR) is 6.0%.
Frequently Asked Questions (FAQ)
What is the difference between interest rate and APR?
The interest rate is the percentage charged by a lender on the principal. The APR (Annual Percentage Rate) includes the interest rate PLUS any other related fees (like origination fees or service charges), providing a more complete picture of the total cost of credit.
Can I calculate the cost if I only know the monthly payment?
Not with this simple formula. This calculator uses a simple interest model. For calculations involving compound interest and fixed monthly payments, you would need a more complex amortization or loan calculator.
Why is my calculated APR different from my lender’s quoted rate?
This calculator uses a basic, non-compounding formula. Lenders often use amortization schedules (compounding interest monthly or daily), which can result in a slightly different effective rate. Always use the lender’s final disclosure for official terms.
What is a good credit cost (APR)?
A “good” APR depends entirely on the type of credit and the borrower’s credit score. Generally, secured loans (like mortgages) have lower APRs (e.g., 4-8%), while unsecured credit (like credit cards) can have APRs ranging from 15% to 30% or higher.