APR - how to calculate from monthly interest rate

PigginSkint

hi there

I am trying to put together my SOA and for quickness I am looking at my last statements for my credit cards.

However, on quite a few of the statements only the monthly interest rate is quoted not the APR and for accuracy's sake I would like to work out what the exact APR is (obviously I can work it out roughly and I know roughly from memory what most of them are).

Does anyone know the formula for working out the APR given the monthly interest rate? (otherwise I am going to have to trawl through all my files to find it!!)

nelly_2

times it by 12 I think???

Astaroth

No, the interest is compound so it isnt as simple as times it by 12 - plus you have to also factor in any fees (though it is only prestige cards these days that still carry annual fees).

You need to take the interest and put it to the power of 12 - so if your interest is 1.2% per month you would get 101.2% balance at the end of month one so the formula would 101.2%^12 = 115.39% and so the APR is 15.39%

Joe_Bloggs

Since interest is compounded monthly then the effects of monthly interest should be considered.
£100 borrowed at 1.5% per month becomes £100 x (1 + 0.015) = £101.50 after a month.
After a second month at the amount owed is £101.50x (1+0.015)= £103.02

The common factor in the calculations is (1+ 0.015) so over 12 months this figure scales the initial debt by this factor 12 times. A quick way of writing this is (1 + 0.015)^12 . Where ^ represents to the power of and the 12 indicates how many times it should be multiplied by itself. The answer is 1.196. The 1 represents the original amount owed and the 0.196 is the annual interest.
Expressed as a percentage (that is x100) this is 19.6%
J_B.

PigginSkint

Thanks for the help all! I will give it a go!

Robert_Sterling

The calculation of an APR is defined in the Consumer Credit Act and is not a task for the faint hearted.

I think you are trying to calculate an AER, not the APR, from a monthly rate.