APR Calculator: What It Is & How to Calculate

How to Read Your APR Calculator Results

• Interest rate: This is the primary input for the APR calculator and represents the annualized cost of borrowing money without fees. The calculator assumes that the interest rate is fixed throughout the life of the loan.
• Repayment term: This input is the number of years that the loan will be outstanding. We built the APR calculator for term loans and did not account for variable payments or interest-only financing options, like credit cards.
• Loan fees included in APR: This is another important input for the calculator. These fees include discount points, origination fees, and mortgage broker fees. Your lender is the best source of information for which fees are included in the APR.
• Loan fees excluded from APR: This input is also important and allows the calculator to determine the total loan cost. This field should include document preparation fees, application fees, credit report fees, and any third-party fees that are not paid to the lender.
• Annual percentage rate (APR): This is the primary output of the calculator and represents the annualized cost of a loan with interest and fees, expressed as a percentage. Short-term loans, like unsecured personal loans, typically have an APR of 10% or more. However, long-term loans like mortgages have an APR closer to 5%.
• Total financing cost: This is another output of the calculator and is the sum of the interest and principal payments of the loan, assuming you keep the loan for the entire term.
• Total cost of the loan: This is an important output because it represents the total amount you will pay for the loan over the entire term. This includes all fees, interest, and principal charged on the loan.
• Next steps: The fees included and excluded from the APR can vary and it’s important to understand what fees have been included or excluded from your APR calculation when reviewing your financing offer. Pay close attention to the total cost of the loan, because this is what you will pay in total.

What Is APR?

Annual percentage rate (APR) is the annualized cost of your loan presenting your finance charge as an annual rate and includes interest and certain fees. Compared to interest rate, APR is a broader measure and the Truth in Lending Act requires its disclosure for consumer loans though it’s sometimes disclosed for other loans.

APR should be one factor you consider, but it doesn’t offer a complete picture. For example, a credit card APR is equal to the interest rate because it excludes fees, but those fees still increase your annual costs. So the APR calculator also provides you with a total financing cost and the total cost of the loan, which includes fees and can help you compare financing offers.

How the APR Calculator Works

An APR calculator estimates your APR by considering your loan amount, interest rate, repayment term, and fees. With this information, you’re not only provided with an APR but also your monthly payment, total financing cost, and total loan cost. This will enable you to not only evaluate the APR but also understand the true cost of your loan.

The APR calculator assumes that your interest rate is fixed throughout the life of the loan. It also assumes that you are making equal monthly payments. Finally, the APR calculator is designed for term loans that have a definite endpoint, unlike revolving loans, like lines of credit and credit cards.

APR Calculator Inputs

The calculator required you to input the loan amount, interest rate, loan term, and fees to produce an accurate result. You’ll break fees into two categories, those included and excluded from the APR. Fees included in the APR are usually required by the lender like origination fees. Those excluded from the APR are usually third-party fees like appraisal and title fees.

Loan Amount

You will need to input the loan amount, which is used with the interest rate and repayment term to calculate your monthly payments. This is important to understand the total amount you’ll pay in interest over the life of the loan and the monthly payments that will be owed.

Interest Rate

The most important input in our APR calculator is the interest rate. The calculator assumes the interest rate is fixed for the life of your loan, and your actual APR may be different if your interest rate is variable. This input is used to calculate how much interest you’ll pay over the life of the loan and is a key component of the APR.

When deciding whether you are being offered a good interest rate, keep in mind that different loans have different typical interest rates. Loans secured by collateral, like mortgages, have lower rates of around 5%. An unsecured loan, like a personal loan, has rates higher than 10%. The actual interest rate you receive will depend on many factors, such as your creditworthiness and the assets (if any) you offer as collateral for the loan.

Loan Fees

Loan fees are entered in dollar amounts in the APR calculator and can be included or excluded. Included fees are charged by lenders like underwriting and origination fees. Excluded fees are charged by third-parties, like appraisal and inspection fees. The APR calculator assumes fees are prepaid, but you may choose to finance the fees, which will increase your costs due to interest paid for them.

Fees that are commonly included and excluded from an APR calculation are:

Loan Fees Included in APR

Lenders have some discretion in determining the fees in your APR, but will typically include origination, underwriting, and processing fees, as well as prepaid interest. You should include these fees in the APR calculator, but compare the results to the loan estimate provided by your lender. All fees should be input in dollar amounts, even if they are calculated as a percentage of your loan.

Fees that typically belong in the included section of our APR calculator are:

• Origination fees: Paid to lenders as compensation for evaluating, processing, and approving mortgages. Your points will depend on the lender and your individual qualifications. Origination fees may be a dollar amount or a percentage of the total loan amount. For our APR calculator, this fee should be input as a dollar amount.
• Underwriting fees: Compensates the lender for loan underwriting costs. It’s quoted as a percentage of the loan amount and is usually around 0.5%. However, for the APR calculator, it should be input as a dollar amount.
• Processing fees: Reimburses lenders for the cost of processing the loan application. Depending on your lender this fee can range from a few hundred dollars up to $1,500. You must input a flat dollar amount for the APR calculator, if you are unaware of how much the processing fee is, we recommend discussing it with your lender.
• Discount points: Paid to the lender, for a reduced interest rate on a mortgage. In most cases, a point costs 1% of the principal and reduces your interest rate by 0.25%. You can estimate this by multiplying the loan amount by 0.01 to input it as a flat dollar amount in the APR calculator.

The APR calculator doesn’t have separate fields for each of the fees. Instead, you must input a sum of the fees that are included in the APR for the calculator to produce an accurate result. This is important because it affects the APR output and adjusts your total financing and loan cost, to help you determine if the financing is affordable.

Loan Fees Excluded from APR

Some fees aren’t included in APR calculations but affect your financing cost. Most are third-party fees, such as appraisal and environmental reports. You’ll also exclude prepaid insurance premiums, property taxes, title insurance, recording fees, application fees, and credit report fees. As with loan fees that are included, you will need to input an estimated dollar amount into the APR calculator.

Some fees typically excluded from an annual percentage rate calculation are:

• Application fees
• Credit report fees
• Appraisal & environmental report fees
• Inspection fees
• Title insurance & recording fees
• Property taxes
• Insurance premiums
• Real estate commissions

There are some exceptions to how these fees are treated. Therefore it’s important to discuss the fees your lender will use for its APR calculation. This helps you better compare financing options to make the best decision.

Repayment Term

The repayment term is input in years for the APR calculator. It’s important in calculating your monthly payments and the interest you’ll pay over the life of the loan. The interest you pay affects your total financing cost and your APR. This means that shorter loan terms will result in less overall interest paid. This makes the repayment term an important factor to consider.

APR Calculator Outputs

The APR calculator outputs your APR, monthly payments, total financing cost, and total cost of the loan. Your APR, total financing cost and the total cost of the loan are the most important factors to consider when comparing financing offers. The APR estimates the annual cost of the loan, based on the total amount of interest you’ll pay and certain fees.

The total financing cost presents how much you’ll pay in interest and all fees over the life of the loan. Your total cost of the loan is the sum of all payments made and includes the principal, interest, and fees. Consider all three, to ensure you account for all fees and that the financing is affordable. Sometimes, loans have similar APRs, but because of excluded fees, one loan may be more expensive than another.

Annual Percentage Rate (APR)

The annual percentage rate is the primary output of the APR calculator. This is an estimate of the yearly cost of borrowing and includes certain fees charged by the lender like origination fees and the interest rate. It also excludes third-party fees like appraisal fees, which are used later to calculate the financing cost and total cost of the loan.

Like interest rates, there isn’t a specific good or bad APR, and the APR of your loan will vary based on factors like your creditworthiness, the amount you are borrowing, and the collateral that is being used for the loan. A good APR for a long-term loan like a mortgage is typically around 5%, whereas a car loan, which is short term has an APR of 7% or higher.

Monthly Principal and Interest (P&I) Payments

The APR calculator uses the loan amount, interest rate, and repayment term you enter to estimate your monthly payment. Use this output to judge if the payments fit your budget. When evaluating your repayment ability, most lenders use a debt-to-income (DTI) ratio calculation, which is derived by dividing your total monthly payments for all loans (including the one you’re getting) by your gross monthly income.

Total Financing Cost

The financing cost is the total amount you must pay in interest and all fees in excess of the loan amount. It’s calculated by adding up the total interest cost, included, and excluded fees from the APR to produce a flat dollar cost of financing. This helps you gauge how much the financing will cost you over the course of the entire loan.

Total Cost of the Loan

The total cost is the sum of all payments, including all fees, principal, and interest for a loan. It’s calculated by combining all the money you will pay out-of-pocket over the course of the loan, including repaying the amount you borrowed. It helps you evaluate the total cost of the loan and compare financing options by total costs.

When & How to Use the APR Calculator

Use an APR calculator to compare financing options and lenders to find the best deal for financing. If you haven’t approached a lender yet, you can use the calculator to get a ballpark estimate for the cost of financing something like a home or a car. You can also use it then to understand if you can afford the payments to finance a large purchase.

If you already have a financing offer, you can use the APR calculator to double-check the rate your lender is offering and make sure you understand what goes into the specific rate. Before you get financing, inputting estimates for various loans can help you determine affordability, or can help you set goals for income or savings to see exactly how much you can afford for a large purchase.

What’s Not Included in the APR Calculator

We built the APR calculator for term loans and assume the interest rate is fixed for the life of the loan. The calculator also assumes monthly payments with amortized even principal and interest. It won’t work for revolving credit, like lines of credit and credit cards and you should avoid relying exclusively on the APR calculator and review the terms with your lender before making a financing decision.

Pros & Cons of an Annual Percentage Rate (APR)

APR is a good way to compare financing terms from several lenders, even when the rates and fees are different. Plus, it’s used by most lenders, particularly for consumer loans. On the downside, lenders don’t always include the same fees in their APR calculations and it doesn’t represent the total cost of the loan.

Pros of an Annual Percentage Rate

The major advantages of using an annual percentage rate are:

• It’s easy to compare: APR is a combination of the interest rate and fees. So, you are better equipped to make an apples-to-apples comparison of financing offers even when the rates and fees are different. Not all lenders include the same fees in the APR so it’s important to understand how APR is calculated when making this comparison.
• It’s used by most lenders: Lenders must disclose APR on loans made for consumer use. This allows consumers to rely on the metric regardless of what financing they get. But, consult your lender about its APR calculation and what it includes.
• It represents the cost of the loan: APR includes interest and fees required by a lender. The excluded fees are optional, required by third-parties, or charged to all applicants. This provides a good tool for comparing different lenders that make similar offers.

Cons of an Annual Percentage Rate

The major disadvantages of using an annual percentage rate are:

• It doesn’t include certain fees: APR excludes certain fees from the calculation. These include ongoing fees like membership and account maintenance fees. It also includes incidental fees, like those incurred for late payments. Finally, fees paid to third parties to get the loan are also excluded.
• It may understate the total cost of your loan: The APR may understate the total cost of your loan because it excludes certain fees and is an estimate of the annual cost. Therefore it’s important to review your total financing cost and total cost of the loan when comparing financing offers because these include all fees.

Bottom Line

It’s important to consider the APR because it allows you to compare financing offers from multiple lenders. However, it’s also important to review the total financing cost because it includes some fees that may be excluded from your APR by your lender. Always discuss the financing details with your lender and ensure that you understand exactly what it includes in its APR calculation.