A crucial skill is the ability to calculate interest on a monthly basis. It’s common to see interest rates expressed as annualized percentages, such as annual percentage yields (APY) or annual percentage rates (APR), but it’s important to understand how much that translates to in actual money. Most often, we consider monthly expenses.
You might have regular food expenses, utility bills, or car payments, for instance. Interest is another monthly (if not daily) occurrence, and annual interest calculations result in significant sums of money. It is the same process to go from an annual rate (APY or APR) to a monthly interest rate whether you are paying interest on a loan or earning interest in a savings account.
Example of Calculating Monthly Interest Rates
Divide the annual rate by 12 to account for the 12 months in a year to determine the interest rate on a monthly basis. To finish these steps, you must convert from percentage to decimal format.
Example: Let’s say your APY or APR is 10%. What is your interest rate per month, and what would you earn or pay on $2,000?
- Divide the annual rate in percent by 100 to convert it to decimal place: 10/100 = 0.10.
- The monthly interest rate is obtained by taking that number and dividing it by 12: 0.10/12 = 0.0083.
- Multiply 0.0083 by $2,000 to get the interest rate in dollars per month on that sum: 0.0083 x $2,000 = $16.60 per month.
- Decimal monthly rate to percentage conversion: 0.0083 x 100 = 0.83 percent.
- Your monthly interest rate is 0.0183%.
If you’d like a spreadsheet with this example already filled out, check out the free Monthly Interest Example spreadsheet and make a copy of it to use with your own data. The simplest method to determine monthly interest rates and expenses for a single month is as shown in the example above.
Interest can be calculated for any time frame, including days, months, and years. The rate you use in calculations is known as the periodic interest rate, regardless of the time period you select. Since rates are typically expressed as annual rates, you must convert them to the periodic rate that best fits your inquiry or financial product.
Note
With other time periods, you can apply the same concept of interest rate calculation:
Calculate the daily interest rate by dividing the annual rate by 360 (or 365, depending on your bank).
Divide the annual rate by four to get the quarterly rate.
Divide the annual rate by 52 to get the rate per week.
Amortization
Your loan balance fluctuates each month for a lot of loans. For instance, you gradually pay off your balance on auto, home, and personal loans over time, and you typically end up with a lower balance each month.
You can calculate (and see) the exact amount of interest you pay each month using an amortization table, which is a process known as amortization.
As time passes, your monthly interest payments drop and more money is applied to the principal of your loan.
Credit cards and home loans
Obtaining a mortgage can be challenging. It is wise to use an amortization schedule to comprehend your interest expenses, but calculating your actual rate may require additional effort. To see how your principal payment, interest payments, taxes, and insurance contribute to your monthly mortgage payment, use our mortgage calculator (below).
Credit cards and mortgage loans
Home loans may be challenging. It is wise to use an amortization schedule to comprehend your interest expenses, but calculating your actual rate may require additional effort.
You may be aware of your mortgage’s annual percentage rate (APR), but keep in mind that this rate may also include expenses other than interest payments (like closing costs). Additionally, the rate on adjustable-rate mortgages is subject to change.
You can make additional purchases and make multiple debt payments on credit cards throughout the course of the month. Even though all of that activity makes calculations more difficult, it’s still important to understand how your monthly interest accumulates. You can frequently use an average daily balance, which is calculated by dividing the total of each day’s balance by the number of days in each month (the finance charge is calculated using the average daily balance). Other times, the card issuer will charge interest daily (in which case you should figure out a daily interest rate rather than a monthly rate).
Interest rates as well as APY
Note
Make sure to calculate using the interest rate rather than the annual percentage yield.
The interest you accrue as your account balance increases as a result of interest payments is compounded into the annual percentage yield (APY). Unless the interest is compounded annually, APY will be higher than your actual rate, so it may not be accurate. The APY, however, makes it simple to quickly determine how much you will earn annually on a savings account with no additions or withdrawals.
Frequently Asked Questions (FAQs)
What is a good interest rate for a credit card?
In February 2022, the average credit card interest rate was 16.17 percent. For store credit cards, you can anticipate paying a few extra points. Business and student credit cards will help you minimize your interest rate.
Which interest rate is prime?
Banks impose a prime interest rate on their most valuable clients.
How do you reduce your credit card interest rate?
Credit card interest rates may be negotiable, but it’s up to the card issuer. A card issuer is more likely to offer a lower rate if you have good credit habits like keeping up with monthly payments. In other words, it’s the lowest possible rate on a given day. This rate is typically available only to institutional customers. The average consumer pays the prime rate plus another rate based on their riskiness as a borrower.