If you have taken out – or are considering taking out – a loan, this calculator allows you to work out the effective Annual Percentage Rate (APR), which is the nominal interest rate plus the compound monthly interest rate.
APR indicates the rate of interest you must pay on a loan for a whole year, rather than a monthly rate. You can use it to compare different credit and loan offers. Generally, the lower the APR, the better the deal.
The nominal interest rate is interest without taking into account the actual number of compounding or depreciation periods that will occur over a year. The "real" value for a year is the APR. All lenders are obliged to tell you what their APR is before you sign an agreement.
To work out the APR from the nominal rate of interest:
The calculation for working out APR is complex. Essentially, what happens is that, every month in a year, 1⁄12 of the nominal interest rate is added and applied to the balance of the loan.
If you have a loan of £100 and the rate of interest is 5%, the compound interest for the first month will be 5% ÷ 12 (months in the year) = 0.416%
This means that 0.416% of the balance of the loan will be added every month, as well as the nominal interest rate, leaving you with an APR of 5.11% and a loan value of £105.11.
We've written this advice specifically for owners and managers of small businesses in the UK. If you're an employee, or your business is based elsewhere in the world, you can still read this article by clicking on the link below, but please note that we won't be able to answer any questions you may have.Continue »