Interest rates are an indicator of how much credit will cost you or how much you can earn on your investments. Interest is the simple measurement of the difference between the money you had at beginning of the transaction and how much you will have pay back or have paid to you at the end of the transaction. The annual percentage rate (APR) is how much you will pay each year or earn each year. It is more complex than simple interest due to compounding of the interest.

## Interest

Total all of the payments you make on a loan. For instance, if you paid $200 a month for 6 months on a $1,000 loan, the total payments are $1,200.

Divide the payment total by the amount of money you borrowed. Using the example in Step 1, you would divide $1,200 by $1,000. The answer is 1.2.

Subtract 1 from the answer and multiply it by 100. This will be the interest you paid on the loan. Using the example in Step 2, 1.2 – 1 = 0.2 x 100 = 20. The interest you paid on the loan was 20 percent. If your answer from Step 2 is less than 1, then you will have a negative interest rate. This means you paid back less than you borrowed.

Multiply the simple interest rate by the annual amount of time the loan was for to get an annual interest rate. Using the example, 6 months is half of a year, or 0.5. Multiply 20 percent by 0.5 to get 40 percent. This isn't the actual interest rate paid, but what the actual rate would be if charged for one year.

## Annual Percentage Rate

Examine you loan papers and write down the number of payments you will make, the amount of the payments and the amount of the original loan. For instance, say you have a $100,000, 30-year mortgage with an interest rate of 6 percent.

Enter your data. Type in your loan amount ($100,000) in PV on your calculator. Then enter the number of payments in N, the interest rate in I/Yr and 0 in FV. Using the example, you would enter 360 in N and 6 in I/Yr.

Solve for PMT. Using the example, you would get 599.5505. This is your payment amount and should be rounded up to the nearest cent ($599.56).

Enter your rounded PMT amount in PMT ($599.56). Enter the loan amount less any lender charges as a negative number in PV. For a mortgage, this would include any closing costs. If you use $2,000 as the amount of lender charges for the example, then you would enter -98,000 ($100,000-$2,000).

Solve for I/Yr. Using the example, the answer would be 6.19. This is the APR. It is more than the loan rate because APR takes into account the compounding of interest.

#### Tips

For easy interest calculations, you can find multiple interest calculators online. All you need to do is plug in the raw data and the calculations will be made for you. With these, you can see the effect that making small adjustments can have on other factors, such as if you increase the payment amount, how much sooner can you pay off the loan or if you get a lower interest rate and how much will it lower your payments.

References

- Consolidated Credit Counseling Services: Understanding APR
- Mortgage Professor: Tutorial on Annual Percentage Rate (APR)
- Easy Calculation: Simple Interest Calcuation Online
- Consumer Financial Protection Bureau. "How Does Paying Down a Mortgage Work?" Accessed Oct. 9, 2019.
- Consumer Financial Protection Bureau. "What Is the Difference Between a Mortgage Interest Rate and an APR?" Accessed Oct. 9, 2019.
- Consumer Financial Protection Bureau. "CFPB Consumer Laws and Regulations: Truth in Lending," Page 14. Accessed Oct. 9, 2019.
- Consumer Financial Protection Bureau. "What Are (Discount) Points and Lender Credits and How Do They Work?" Accessed Oct. 9, 2019.

Tips

- For easy interest calculations, you can find multiple interest calculators online. All you need to do is plug in the raw data and the calculations will be made for you. With these, you can see the effect that making small adjustments can have on other factors, such as if you increase the payment amount, how much sooner can you pay off the loan or if you get a lower interest rate and how much will it lower your payments.

Writer Bio

James Rada, Jr. was a newspaper reporter for eight years and earned 23 awards from the Maryland Delaware D.C. Press Association, Associated Press, Society of Professional Journalists, Maryland State Teachers’ Association and CNHI. He also worked for 12 years as a marketing communications writer, earning a Print Copywriter of the Year Award from the Utah Ad Federation. He holds a Bachelor of Arts in communications.