What rate are you really paying?

How it works

The tool finds the monthly rate that makes the present value of the installments equal to the amount financed (the same math as a standard amortizing loan). The nominal rate is that rate annualized; the APR adds the extra fees (upfront and monthly) and turns them into the effective annual percentage cost.

Why the APR matters

It's the only number that lets you compare different offers. A «zero interest» plan with $50 of fixed fees is not zero at all: try entering them and watch the APR.

Note

The calculation assumes constant monthly payments in arrears. Informational tool: the contract is what counts.

Why two rates for the same instalment

The nominal rate is the pure one: the rate that interest on the capital is calculated with, and nothing else. The annual percentage rate of charge answers a different question, namely what the operation really costs, and it takes in everything paid to obtain the loan: arrangement fees, collection charges, stamp duties, and insurance when it is compulsory in order to get that loan.

That is why the APR is always equal to or higher than the nominal rate, and why the gap between them shows how much the side costs weigh. A 6% nominal with a 6.3% APR is a clean product; a 6% nominal with a 12% APR is a product where most of the profit is not in the interest.

The «zero rate» that is not zero

This is the case that made the APR compulsory by law. A loan at zero nominal rate with a hundred of arrangement fees and two a month for collection has an APR of several percentage points, because those costs behave exactly like interest: they are paid to have the money sooner. On a small amount the effect is violent, because the same fixed cost is spread over less capital.

The term works in the opposite direction and that confuses people: a fixed cost spread over twenty-four months weighs less than over six. It is why lengthening a loan can lower the APR and raise the total repaid. The two numbers answer two different questions, and the one that usually matters is the second.

What the APR still leaves out

Not everything goes into the sum. Optional insurance, that is the kind you can refuse without losing the loan, stays out, and so do the contingent costs: late payment interest, reminder charges, early repayment fees. They are precisely the items you meet when something does not go to plan.

There is then a practical question always worth asking about insurance: if I refuse it, do I still get the loan, and on the same terms? If the answer is yes, the policy falls outside the APR and is a free choice; if it is no, it must be inside. Asking in writing is the quickest way to know what kind of offer you are looking at.

In the end, one number decides

The APR is for comparing, but the figure to look at before signing is the total amount repayable: capital plus every cost, which the European information sheet sets out in full. Two offers with similar APRs can have different totals if their terms differ, and the total is the one number that cannot be interpreted.

The sheet that contains them all is standard across the European Union for consumer credit, precisely so that it can be compared line by line between different lenders. It must be asked for before signing, not after: it is a right, and it is free.

Nearby tools

To see how each instalment is split there is Amortisation schedule, and for existing debts Debt payoff time. For a mortgage How much mortgage can I afford and Early repayment.