Total Interest Paid:
Calculator Use
The APR calculator is a critical tool for any borrower looking to understand the true cost of credit. While the nominal interest rate tells you the cost of the principal loan, the Annual Percentage Rate (APR) incorporates the interest rate plus any additional fees and costs required to secure the loan. Use this tool to compare different loan offers accurately by normalizing all costs into a single percentage.
By entering your loan details, you can see how upfront fees like origination charges, private mortgage insurance (PMI), and closing costs increase your effective interest rate over the life of the loan.
- Loan Amount
- The total amount of money you are borrowing (the principal).
- Interest Rate
- The stated annual interest rate for the loan, also known as the nominal rate.
- Loan Term
- The length of time you have to repay the loan, expressed in months.
- Total Closing Fees
- Any upfront costs such as processing fees, documentation fees, or points that are added to the cost of borrowing but not included in the principal.
How It Works
Calculating APR is more complex than a standard interest calculation because it requires finding the rate that equates the present value of all future payments to the actual amount received (Loan Amount minus Fees). The apr calculator uses an iterative process to solve for this rate.
APR Calculation Formula: PV = Σ [PMT / (1 + i)^n]
- PV (Present Value): The net loan amount (Principal – Fees).
- PMT (Payment): The fixed periodic payment based on the nominal interest rate.
- i: The periodic interest rate (which we solve for).
- n: The number of periods (months).
Calculation Example
Example: Imagine you take out a personal loan for $10,000 with a 5% interest rate for 3 years (36 months). The lender charges a $200 processing fee.
Step-by-step solution:
- Calculate Monthly Payment: Using the 5% nominal rate on $10,000 for 36 months, the payment is $299.71.
- Determine Net Loan: $10,000 – $200 = $9,800.
- Solve for APR: We must find the interest rate that results in a $299.71 payment on a $9,800 loan over 36 months.
- Result: The APR is 6.381%, which is higher than the stated 5% because of the upfront fee.
Common Questions
What is the difference between APR and Interest Rate?
The interest rate is the percentage of the principal charged by the lender for the use of the money. The APR is a broader measure that includes both the interest rate and other costs like broker fees, points, and closing costs. APR is always equal to or higher than the interest rate.
Why is APR important?
APR provides a "bottom line" number for comparing loans. For instance, one lender might offer a 4% interest rate with $2,000 in fees, while another offers 4.2% with $0 fees. Comparing the APR of these two loans reveals which one is actually cheaper over the full term.
Does APR include all fees?
Not necessarily. While it includes most finance charges (like origination fees and mortgage insurance), it typically excludes "non-finance" charges like appraisal fees, title insurance, and attorney fees. It is always best to check the Loan Estimate document provided by your lender.