What Is APR? How It’s Different From APY and How to Calculate It

What Is APR? How It’s Different From APY and How to Calculate It

Calculator Use

The Advanced APR Calculator finds the effective annual percentage rate (APR) for a loan (fixed mortgage, car loan, etc.), allowing you to specify interest compounding and payment frequencies. Input loan amount, interest rate, number of payments and financing fees to find the APR for the loan. You can also create a custom amortization schedule for loan principal + interest payments.

See the Basic APR Calculator for simple APR calculations.

Loan Amount
The original principal on a new loan or remaining principal on a current loan.
Interest Rate
The annual interest rate or stated rate on the loan.
The frequency or number of times per year that interest is compounded. If compounding and payment frequencies do not coincide, we convert interest to an equivalent rate to sync with payments and then perform calculations in terms of payment frequency.
Number of Payments
The total number of payments required to repay the loan.
Payment Frequency
How often payments are made.
Payment Amount
The amount to be paid at each payment date.


Mortgage Loan APR Calculation Example

Now that we’ve defined the APR concept, we can move on to calculating the APR on a loan in Excel.

To access the APR spreadsheet, fill out the form below:

In our illustrative scenario, let’s say that you’ve taken out a mortgage loan with the following lending terms:

  • Mortgage Amount: $200,000
  • Lending Term: 30 Years, or 360 Months
  • Interest Rate (Annual): 5%

Remember, APR does not just factor in the interest expense, but related fees, too.

  • Origination Fee: $1,000

Monthly Payment Excel Formula

Using the “PMT” function in Excel, we can calculate the monthly payment amount.

  • Monthly Payment: PMT (Interest Expense / 12, Borrowing Term in Months, Loan Principal)

If we plug in our numbers, we get the following:

  • Monthly Payment = PMT ($10,000 / 12, 360, $200,000)
  • Monthly Payment = $1,074

APR Excel Formula

The “RATE” Excel function can then be utilized to arrive at our mortgage’s annual percentage rate (APR).

  • APR = RATE (Borrowing Term in Months, Monthly Payment, (Loan Principal – Origination Fee)) * 12

Since we already have all the required inputs, the only remaining step is to plug them into the Excel formula.

  • APR = RATE (360, $1,074, ($200,000 – $1,000)) * 12
  • APR = 5.044%

The APR on the mortgage loan – as shown in the screenshot of the model below – is calculated at approximately 5.0%.

APR vs. nominal interest rate

Nominal interest rate is the rate of interest without taking account of inflation. It is not the real interest rate as used by banking institutions. Nominal interest rate when adjusted for inflation becomes the real interest rate, which is usually different from the nominal interest rate.

When banks advertise their interest rates, it is usually the nominal rates that are advertised. Nominal rates are the base rates that banks use for lending.

When depositors make a deposit or an investment with a bank, they expect to make money on their investment. The amount earned is determined by the real interest rate, not the nominal interest rate.

The real interest rate can increase or decrease. When there is an increase, the depositor makes more money, and if the real rates fall, they make less.

APR vs. Interest Rate

It’s easy to lump interest rate and APR into the same category, but they’re actually two different types of rates.

Your interest rate is the percentage charged on the principal loan amount. In the case of a credit card, that loan amount would be your card balance.

Compared with interest rate, “APR is a broader measure of the cost of borrowing money,” according to the CFPB. It includes the interest rate plus other costs, such as lender fees, closing costs and insurance. If there are no lender fees, the APR and interest rate may be the same—and that’s typically the case for credit cards.

What’s the Difference Between APR and Interest Rate?

The difference between a loan’s APR and its interest rate can depend on the type of financial product.

For installment loans, such as personal, auto, student and mortgage loans, the APR and interest rate may be the same if there are no finance charges. However, if there is a finance charge, such as an origination fee, the APR will be higher than the interest rate because your cost of borrowing is more than the interest charges alone. The difference between the APR and interest rate can also increase if the loan’s term is shorter, as you’ll be repaying the entire finance charge more quickly.

On credit cards, the APR and interest rate are the same because a credit card APR never takes the card’s fees into account. As a result, you may want to compare not only cards’ APRs, but also their annual fees, balance transfer fees, foreign transaction fees and any other fees when deciding on a credit card. Keep in mind that you can generally avoid paying interest on your credit card if you pay off the balance in full every month.

Maintain your finances by checking and managing credit card APR

Understanding credit card APR helps you understand how credit card interest can accrue quickly and why it helps to regularly monitor your rate and your total balance.

As a next step, see if you qualify for a credit card with a lower purchase APR. If you find a lower rate credit card that also offers balance transfers, transfer the current balance from your higher-APR card, and start using extra cash to pay it down throughout the month.

About the Author

Cynthia Paez Bowman is a personal finance writer with degrees from American University in international business and journalism. Besides writing about personal finance, she writes about real estate, interior design and architecture. Her work has been featured in MSN, Brex, Freshome, MyMove, Emirates’ Open Skies magazine and more.

Common APR FAQs

Here are some additional questions you may be having about APRs.

What is a good APR?

When thinking about what a good APR should be, there are many factors to consider. Those might be your credit score, the interest rate set by the bank or the competing rates that are offered in the market. You’ll also want to be aware of the length of the term, and whether they’re introductory rates that will end up being a higher APR in the future. A good APR is not one-size-fits-all, so you should consider all these factors and speak to an expert if there’s still confusion.

What is the best mortgage APR?

At first glance, you might want to consider a mortgage loan with the lowest APR, though a lower APR may require you to pay other fees or mortgage points. If you prefer to use that money toward a down payment or other household expenses, you might want to consider a mortgage loan with a higher APR that doesn’t require you to pay fees and mortgage points. Again, APR is not one-size-fits-all.

What does APR mean for you?

You don’t want to pay more than necessary to borrow money. Lenders know that borrowers will be enticed by a rate that’s lower than one offered by a competitor, although shopping around based only on interest rates could inadvertently cause you to spend more than you should on a loan.

APR is a valuable tool to help you choose wisely. But remember to take your personal situation into account too. For starters, think about how long you plan to live in a home. If you’re buying your forever home, you’ll want the mortgage that is cheapest in the long run. If you plan on moving in 5 years, focusing solely on APR or the cost of a loan over its lifetime might not make sense.

Types of APR

A credit card’s APRs depend on the charges made. For instance, your lender may charge one APR for balance transfers from a different card, a second APR for purchases, and a third APR for cash advances. It’s also likely that your lender has penalty APRs set at high rates for customers who violate the terms of their cardholder agreement or don’t pay off their balance on time.

Some credit card companies may use an introductory APR as a marketing tactic to incentivize signing up for their card. These APRs are low or even 0%, in an attempt to attract new customers.

Your specific APRs are usually going to be based mainly on your credit score. Those with excellent credit are offered loans with much lower interest rates than those with bad credit.

Unfortunately, if you have been unable to pay off loans in time, your interest rates on borrowed money will be higher. That’s because you are seen as more of a potential liability to the financial institution (and more of a potential source of profit, but that is a discussion for another day).

Typically, loans come with either a fixed APR or a variable APR. The fundamental difference between these two is that a fixed APR loan has a set interest rate that will not change, and a variable APR loan has an interest rate that can change at any time.

In a fixed APR loan, the interest rate applied to a principal amount borrowed is guaranteed not to change. This means that the APR you calculate based upon your interest rate will also not change. The amount paid each year for money borrowed will remain at the same proportional rate.

In a variable APR loan, the interest rate applied to the principal amount occasionally changes, and the APR changes along with it. This change is dependent on changes in the U.S. prime lending rate or other indexes. The borrower is subject to pay more if there is an upward change in interest.

Typically, credit cards come with a variable rate, but certain cards, such as retail store cards, may have a fixed rate. Even a fixed rate is subject to change, though, but there are usually policies outlining how many days in advance you must be notified before this change occurs.

Where Can You Find Your Account’s APR?

Your credit card APR can be found in your account opening disclosures and on your monthly credit card statement. In many cases, you can find your current APR—and determine whether it’s based on the prime rate—by looking at the section about interest charge calculation.

APR on Loans Explained

The APR on a loan – a mortgage, for example – marks the total yearly cost associated with borrowing money from a financial institution.

Since more fees beyond just interest expenses are considered in the APR of a loan, the metric provides a more accurate estimation of how much in total that a borrower must pay to take out a loan.

The APR on loans facilitate comparisons across different loan offerings (i.e. for the borrower to pick the cheapest option), yet in actuality, the comparison is not “apples-to-apples” due to several factors:

  • Oftentimes, loans tranches can be “taken out” (i.e. repaid in full earlier than scheduled) or refinanced before the date of maturity.
  • Standardizing the fees charged by the lender is practically impossible (i.e. different types per financing arrangement).
  • Contingencies can be influential factors such as prepayment penalties, conditional fees, and incentive programs.
Credit Card APR

Under the context of credit cards, the APR determines the amount of interest due based on the carrying balance from month to month.

If each monthly bill is paid in full and on time, no interest will be incurred.

Unique to credit cards, interest is calculated daily, meaning that a credit card company charges borrowers by multiplying the ending balance by the APR and then dividing by 365.

The amount of interest charged is subsequently added to the outstanding balance the following day.

In contrast to credit cards, the APR on a loan reflects more than just the interest payments that must be met.

How does APR work?

On a loan, APR includes the interest rate plus any fees the lender charges, such as origination, legal, or underwriting fees. APR isn’t so complicated on a credit card — it’s just the interest rate stated as a yearly rate.

The APR was designed to give borrowers more information about what they’re really paying to borrow money. Thanks to the federal Truth in Lending Act (TILA), lenders are required to disclose the APR on every consumer loan agreement before the borrower signs the contract. The TILA disclosure also includes other important terms, including:

  • Finance charge, or the cost of credit expressed as a dollar amount.
  • Amount financed, which is typically the dollar amount you’re borrowing.
  • Payment information, such as the monthly payment, the total number of payments you’ll make, and the sum of all your payments combined (which includes principal plus financing costs).
  • Other information, such as late fees and prepayment penalties.

When you apply for the loan and receive the TILA disclosure, it might be written into the loan contract. It’s a good idea to review the whole contract and make sure you understand the terms before signing on the dotted line.

How is APR calculated? 

The formula for calculating APR is as follows:

                                                  Alyssa Powell/Insider

Where n = number of days in the loan term.

Check out one example to see how it works. Let’s say you take out a $5,000 personal loan with a two-year loan term and a $400 origination fee. The total interest you pay over the life of the loan equals $980. Follow these steps to calculate the APR:

  1. Add up the fees and interest: $400 + $980 = $1,380
  2. Divide that number by the principal, or the amount you’re borrowing: $1,380/$5,000 = 0.276
  3. Divide by the number of days in the loan term: 0.276/730 = 0.00037808219
  4. Multiply what you’ve got by 365: 0.00037808219 x 365 = 0.138
  5. Now multiply by 100 to find the APR: 0.138 x 100 = 13.8%

What is a good APR?

A good APR is simply one that’s affordable to you, but there are some general rules you can follow when shopping around. For instance, the National Consumer Law Center says APRs over 36% are unaffordable

But it also depends on the type of financial product and loan term. The APR on an auto loan might be higher than one on a mortgage, but the longer term on a mortgage means you’ll likely pay more interest over time.  

APR varies with the type of financial product you’re taking out, but it also depends on the lender’s overhead costs. For example, an online lender often has lower expenses than a large bank with brick-and-mortar locations. “With lower expenses, they can generally charge less APR to achieve their profit margin,” Stivers says, “than a larger lending institution with many locations and more employees.”

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