Calculating interest month-by-month is an essential skill. You often see interest rates quoted asan annualized percentage—either an annual percentage yield (APY) or an annual percentage rate (APR)—but it’s helpful to know exactly how much that adds up to in dollars and cents. We commonly think in terms of monthly costs.
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 formatto 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?
- Convert the annual rate from a percentage to a decimal by dividing by 100: 10/100 = 0.10
- Now divide that number by 12 to get the monthly interest rate in decimal form: 0.10/12 = 0.0083
- To calculate the monthly interest on $2,000, multiply that number by the total amount: 0.0083 x $2,000 = $16.60 per month
- Convert the monthly rate in decimal format back to a percentage (by multiplying by 100): 0.0083 x 100 = 0.83%
- Your monthly interest rate is 0.83%
Want a spreadsheet with this example filled in for you? See the freeMonthly 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 costsfor 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.
Note
You can use the same interest rate calculation concept with other time periods:
- 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.
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.
That process is called amortization, and an amortization table helps you calculate exactly how much interest you pay every month as a result of this changing loan balance.
Assuming regular periodic payments, your monthly interest costs generally decrease over time—and the amount that goes toward your loan balanceincreases.
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.
Lenders are required to disclose the annual percentage rate (APR) on your mortgage, but keep in mind that APR can contain additional costsbesides interest rate charges(such as closing costs). Your mortgage interest rate can generally be found under the loan terms in your loan estimate. Also, note that 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 anaverage 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
Note
Be sure to use the interestratein your calculations—not theannual percentage yield.
The APY accounts for compound interest, 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 when converting to a monthly rate. That said, APY makes it easy to quickly find out how much you’ll earn annually on a savings account with no deposits or withdrawals.
Frequently Asked Questions (FAQs)
What is a good interest rate for a credit card?
The average credit card interest rate was 21.47% in November 2023. You can expect to pay a few more points for store credit cards. Business and student credit cards will help you minimize your interest rate.
What is the prime interest rate?
The prime interest rate is what banks charge their best customers. 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.
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.
