How to Calculate Interest with APR

With anything containing numbers, there is a usually a formula to solve it. Here are the steps to calculate the amount of interest you have to pay on your outstanding balance. 

Steps

1. Take your APR and divide it by 365 (numbers of days in a year) to get a daily periodic rate (DPR)
2. The DPR is then multiplied by the amount of days the outstanding balance have incurred 
3. That amount is then multiplied by the amount of outstanding balance you owe
4. The result is the amount of interest that is additional to your outstanding balance

Graphical Steps

Source: Bank of America

Example calculation
Purchase APR: 20% = 0.20
Outstanding balance: $10,000
Days incurred: 1 day

• 0.20 ÷ 365 = 0.0005479% DPR
• 0.0005479 × 1 day × $10,000 = $5.479

So, after 1 day with 20% APR on a balance of $10,000, you will have to pay $5.479 in interest. 

The total amount you owe after 1 day of an outstanding balance is $10,005.479. 

Keep in mind, the bank charge compound interest. In simple terms, it is the amount you owe plus the interest you have already incurred will also accumulate additional interest until the debt is paid off. 

From the previous example
After 2 days of compound interest, the total would be $10,010.961

• 0.0005479 × 1 day × $10,000 = $5.479
• $10,000 + $5.479 = $10,005.479
• 0.0005479 × 1 day × $10,005.479 = $5.482
• $10,004.109 + $4.1106 = $10,010.961

NOT

• 0.0005479 × 2 days × $10,000 = $10.958
• $10,000 + $10.958 = $10,010.958

Granted, these two numbers are very similar, and if you only have a little bit of debt and/or a low APR, the difference are negligible. However, if you have a high balance and/or high APR, the compounding factor can be significant.