Calculating APR from monthly interest rate

skintscotsman

How do you calculate the APR from the monthly interest rate shown on the credit card statements?

For example, one of my statement says:

"Purchase Interest 1.167% per month (14.9% APR)".

Another simply has the Monthly Interest Rate.

If someone could provide me with the equation to do this, I would be extremely grateful.

Thanks

mountainofdebt

Will tell you what to do as I can't write it down in a formula

take the monthly interest rate and divide it by 100.

then add 1.

this answer should then be raised by the power of 12 (or times this answer by itself 12 times)

take away 1 and multipy by 100

skintscotsman

((MIR/100)+1)^12 :money:

Robert_Sterling_3

skintscotsman wrote:

((MIR/100)+1)^12 :money:

When you have done that little sum
you then need to subtract 1
then multiply by 100 to get the answer as a percentage per year..

Let Monthly Interest rate be denoted by r

Your formula becomes ((r/100) +1)^12

It should be 100* [ ( ( r/100 ) +1 )^12 -1 ]

Thus 1% per month = 12.48% per year.
2% per month = 26.82% per year.

Milarky

skintscotsman wrote:

((MIR/100)+1)^12 :money:

So this should be:

( ( ((MIR/100)+1)^12 ) - 1 ) x 100% to give the APR.

Also note that the exact result is likely to be almost half way between the '9' and '0'. Thus '14.9APR' had been rounded down from an exact figure of something like 14.949%. This is a bit cheeky, if quite legitimate. The corresponding monthly rate is usually quote to 3 decimal places - as '1.167%'

Rafter

The APR calculation is actually based on a ficticious transaction on the first day of a month of £1500 paid back in 12 equal installments at the end of each of the next 12 months.

The total charge in interest, annual fees or any other charges are all included in the calculation.

The calculation does not take account of any promotional 0% offers.

If you have access to Excel or another spreadsheet then the formula for the conversion in the above example would be:

=(((1+1.167%)^12)-1)*100

As Milarky points out though, the card and loan companies can get creative with their roundings and are even allowed to be out by a certain amount. If you look at loan comparison sites, this is why loans with apparently the same APR have different repayment amounts.

Card companies can also get creative with how the apr is calculated, whether it is from the date you make the purchase, or the date it is added to your credit card account for example.

Which? and others are campaigning to try and get the APR calculation standardised further so that the use of these 'tricks' is reduced further.

R.

Robert_Sterling_3

A loan has a typical APR of for example 5.35%
At least 66% of those actually granted a loan must be paying 5.35% or less.
But
and it is a big but
the loan company can sell on, ( unless you tick this box ) the applications it does not wish to grant, to another lender who will offer a loan at a higher rate than 5.35%.
They might for example sell on 80% of the applications and obtain significant commissions from doing this.

Then they lend at 5.35% to two third of the remaing 20% i.e. to less than 14% of the original applicants.

( Confession time. Someone I know very well did this in the early 1980s )

Rafter

AND

and it is a very big AND (if I knew how to make it big)

Credit companies can 'counter offer' a different product.

So people applying for the 6.9% no hassle platinum card from Capital One can get declined, but then sent an application form for the 15.9% card or even the 29.9% card.

So 67% of people who sucessfully apply for the 6.9% card get offered the 6.9% rate, but loads of others get declined and offered a much worse rate.

THIS MAKES A COMPLETE NONSENSE OF COMPARISON TABLES because what appears like a great rate is only offered to a small minority and the comparison products are often more generally available.

R.

Robert_Sterling_3

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