How do you calculate annual percentage rate

how do you calculate annual percentage rate

Things You'll Need

Calculator with FV and PMT buttons

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.

Source: ehow.com

Category: Bank

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