APR vs. Interest Rate Calculator

Understanding the APR vs. Interest Rate Calculator

When you take out a loan, the interest rate is the headline number, but the Annual Percentage Rate (APR) tells a more complete story about the cost of borrowing. This calculator is designed to highlight the difference and help you make a more informed financial decision.

How It Works

The calculator uses your inputs to first determine the monthly payment based on the nominal interest rate, then it calculates an approximate APR based on the total financing cost.

• Loan Amount: The initial amount of money you are borrowing.
• Origination & Other Fees: These are upfront costs charged by the lender to process the loan. They are subtracted from your loan amount to get the "net proceeds" you actually receive.
• Nominal Interest Rate: The base rate used to calculate interest on the loan principal.
• Loan Term: The duration of the loan, in years.

The Concept of APR

The Truth in Lending Act requires lenders to disclose the APR so that consumers can more easily compare the total cost of different loans. The APR expresses the cost of credit as a yearly rate. It includes the interest rate plus other charges like origination fees, discount points, and some closing costs. Because it includes these extra costs, the APR is usually higher than the advertised interest rate.

This calculator provides a simplified APR approximation. The official APR calculation can be more complex and is legally required to be provided by the lender in your loan documents. However, this tool serves as an excellent way to see how upfront fees impact the overall cost of your loan.

Frequently Asked Questions