For example, you have monthly utility bills, food costs, or a car payment. Interest is also a monthly (if not daily) event, and those recurring interest calculations add up to big numbers over the course of a year. Whether you’re paying interest on a loan or earning interest in a savings account, the process of converting from an annual rate (APY or APR) to a monthly interest rate is the same.
Monthly Interest Rate Calculation Example
To calculate a monthly interest rate, divide the annual rate by 12 to reflect the 12 months in the year. You’ll need to convert from percentage to decimal format to complete these steps. Example: Assume you have an APY or APR of 10%. What is your monthly interest rate, and how much would you pay or earn on $2,000? Want a spreadsheet with this example filled in for you? See the free Monthly Interest Example spreadsheet, and make a copy of the sheet to use with your own numbers. The example above is the simplest way to calculate monthly interest rates and costs for a single month. You can calculate interest for months, days, years, or any other period. Whatever period you choose, the rate you use in calculations is called the periodic interest rate. You’ll most often see rates quoted in terms of an annual rate, so you typically need to convert to whatever periodic rate matches your question or your financial product.
Amortization
With many loans, your loan balance changes every month. For example, on auto, home, and personal loans, you gradually pay down your balance over time, and you usually end up with a lower balance each month.
For a daily interest rate, divide the annual rate by 360 (or 365, depending on your bank).For a quarterly rate, divide the annual rate by four.For a weekly rate, divide the annual rate by 52.
That process is called amortization, and an amortization table helps you calculate (and shows you) exactly how much interest you pay every month. Over time, your monthly interest costs decrease—and the amount that goes toward your loan balance increases.
Home Loans and Credit Cards
Home loans can be complicated. It is smart to use an amortization schedule to understand your interest costs, but you may need to do extra work to figure out your actual rate. You can use our mortgage calculator (below) to see how your principal payment, interest charges, taxes, and insurance add up to your monthly mortgage payment. You might know the annual percentage rate (APR) on your mortgage, and keep in mind that APR can contain additional costs besides interest charges (such as closing costs). Also, the rate on adjustable-rate mortgages can change. With credit cards, you can add new charges and pay off debt numerous times throughout the month. All of that activity makes calculations more cumbersome, but it’s still worth knowing how your monthly interest adds up. In many cases, you can use an average daily balance, which is the sum of each day’s balance divided by the number of days in each month (and the finance charge is calculated using the average daily balance). In other cases, your card issuer charges interest daily (so you’d want to calculate a daily interest rate—not a monthly rate).
Interest Rates and APY
The APY accounts for compounding, which is the interest you earn as your account grows due to interest payments. APY will be higher than your actual rate unless the interest is compounded annually, so APY can provide an inaccurate result. That said, APY makes it easy to quickly find out how much you’ll earn annually on a savings account with no additions or withdrawals.
