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How the APR works on most loans.

sarge12
Senior Contributor

How the APR works on most loans.

Some might not really understand how you can easily figure how much interest is due each month based on the APR. This is for a fixed rate installment loan. Normally this type of loan would be applied to car loans and mortgages. The current balance after making a payment is used.

The formula is as follows, and for this example I will use the 1.99% APR and current balance on my car loan of $28,567.37.

28,567.37x1.99%(or .0199)=$568.49 You can then take that figure and divide it by 365 to come up with the interest due each day of 1.5575. Then you multiply that daily interest by the number of days in that month...28, 29, 30, or 31. Since January has 31 days, I will use 31. 1.5575x31=$48.28 which is what my interest will be next month. Now on a credit card that the balance might vary, they take each days balance added together and divided by the number of days in the month to obtain the average daily balance, and that is what the interest for that billing cycle is figured on. That is assuming you carry a balance. So if, on a credit card in a 30 day month 15 days had a balance of 100 dollars, and 15 days had a balance of 150 dollars, the average daily balance would be 125 dollars, and that is the balance the APR would be applied to for that billing cycle. In both methods, there can be slight differences based on whether the bank uses the most common 365 days in the year, or actually uses 365.25 or even 366. Most just use 365. You can also take the 1.99% and divide that by 365 to obtain the daily periodic rate and then multiply that times the balance (or the ADB on revolving credit) times the number of days in the month. So (.0199/365)x31(January)x28,567.37(balance)=$48.28 I think most here might already know all of this, but it could help someone who does not.

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