How to calculate APR on installment loans

If you have taken out a loan and are paying it back in instalments, you can calculate the annual percentage rate, or APR, based on the interest you are paying each month. In most cases, with an instalment loan you pay the same amount each month over the course of the loan. But the amount that goes to interest slowly goes down and the amount that goes to the principal goes up. The APR you figure using this method will be an average APR over the life of the loan.

Multiply your monthly payment by the number of months in the term of the loan. For example, if you have a five-year loan and pay £195 per month, the total is £11,700.

Subtract the principal, the amount you originally received for the loan, from the total from Step 1 to get the total interest you will pay. For instance, if you received £7,800 and will pay a total of £11,700 over the term of the loan, you will pay £3,900 in interest.

Divide the total interest from Step 2 by the number of years on the loan. In this example, it will equal £780.

Divide the figure from Step 3 by the total payments you will make from Step 1 to get the APR over the course of the loan. Here, £780 divided by £11,700 equals 0.0667, or 6.67 per cent.

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About the Author

Bill Brown has been a freelance writer for more than 14 years. Focusing on trade journals covering construction and home topics, his work appears in online and print publications. Brown holds a Master of Arts in liberal arts from St. John's University and is currently based in Houston.

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