How to calculate Annual Percentage Rate APR?

[GildaPrice]

I was at a bank, and the clerk offered a loan interest rate of 5.48%. Can anyone help me how to calculate Annual Percentage Rate? If the interest rate is 5.48%, how much is APR?

[steven]

If your loan has a 5.48% rate, you’ll pay $5.48 per $100 you borrow annually. Other things equal, your APR is 5.48%. Unfortunately, all other things are not equal in the real world. In addition to the interest you also pay fees, insurance, other charges, and a compound interest. You need to consider all these extras when calculating APR. So, mathematically, APR is always more than a simple interest rate. The exact difference can't be simply said, it needs to be calculated. The bank representative should be able to tell you the APR and also what was included in the calculation, they must provide this information by law.

If you want to find out APR yourself, you need to find all the charges first. All the one-time up front charges asl well as those recurrent charges. Then, you do the math using a financial calculator (or in Excel).

[atari]

You can do this easily in Excel. For example, you borrow $100,000 with a 5.48% interest rate. You also have $1,000 in closing costs. The APR on a 30 year fixed rate mortgage would be 5.57%.

Step 1:

=PMT(0.0548/12,360,101000)

- 0.0548/12 is the monthly interest rate on your loan
- 360 is the number of periods (30 years = 360 months)
- 101,000 is the present value of your loan plus any additional costs

Result: - $572.20

This is your monthly payment. The minus sign denotes that it is your cash outflow.

Step 2:

=RATE(360,-572.20,100000)

- 360 is the number of periods (30 years = 360 months)
- 572.20 is your payment
- 100,000 is the present value of just your loan

Result: 0,46%

This is your monthly rate. Multiply it by 12, and you get 5.57% which is your APR. The APR is 0.9% higher than your interest rate in this case.
Note, this is only a model calculation for illustration. Your actual APR will vary depending on your costs and other factors.

[GildaPrice]

This is great. Thanks very much for your explanation. Awesome.