How to Get APR From a Monthly Interest Rate

Annual percentage rate (APR) is the cost of credit expressed as a yearly rate. It is calculated by annualizing shorter-period rates. There are two basic types: Nominal APR, which is a simple extrapolation of a shorter-period rate; and effective APR, where fees and interest are compounded each period. In the U.S., Federal Deposit Insurance Corporation Regulation Z governs the calculation and disclosure of APR. Open-ended credit calculations apply to credit cards and lines of credit and utilize nominal APR. Close-ended credit calculations are featured in home mortgages and auto loans and are figured using effective APR.

Instructions

Nominal APR Calculation

1

Identify the monthly finance charge on your credit statement. Credit cards, home equity loans and other revolving credit lines highlight key amounts like the monthly finance charge according to the standards set by FDIC Regulation Z.

2

Identify the average account balance on which the monthly finance charge is based. The lender has calculated the average account balance by summing each day's account balance and dividing by the number of days in the monthly billing period.

3

Calculate the monthly interest rate. It is equal to the monthly finance charge divided by the average account balance.

4

Calculate the nominal APR. It is equal to the monthly interest rate multiplied by 12.

Effective APR Calculation

5

Identify the nominal interest rate. This is usually the rate advertised by the lender. For instance, a bank that advertises a 5 percent annual rate for mortgages is typically quoting the nominal interest rate. The nominal interest rate doesn't account for the effect of compounding interest.

6

Calculate the monthly compounding interest rate. It is figured by adding one to the nominal interest rate and dividing the sum by 12.

7

Calculate the effective APR by raising the monthly compounding rate to the 12th power and then subtracting one. For example, a monthly car loan advertised at an 8.25 percent nominal interest rate will have an effective APR given by:

Effective APR = ((1 + 0.0825 / 12)^ 12) -- 1 = 8.57%