How to Calculate the Interest Rate on a Loan

The interest rate on a standard loan, also called the APR (annual percentage rate) is what a bank charges you for the benefit of using its money. In most cases, the bank has to disclose the interest rate when it first gives you the money. But if for some reason you don't know the interest rate on a loan, you can figure it out as long as you have a few other key pieces of information about the loan on hand.

Step 1

Gather key details about the loan, including the total interest charge you have to pay for the year, the principal (amount you borrowed), the frequency of payments and the length of your loan.

Step 2

Enter these details into a formula to determine the interest rate (APR). The formula is 2nI/(P[T + 1]) where n is the number of payment periods for a year (12 for a standard monthly loan), I is the total interest charged over the course of the loan, P is the principal balance borrowed initially and T is the total number of payments on the loan.

Step 3

Perform the calculation after inserting the figures for the loan in question. Say, for example, you have to pay $100 in interest over the course of the loan on a $1,000 loan that lasts for three years and requires monthly payments. The formula with figures filled in is 212100/(1,000[36+1]), which equals about .065 or a 6.5 percent interest rate.

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