10/4/2019

Financial Guides

An Overview of Various Ways APR can be Calculated

Lenders use many different factors to calculate their total APR, and it’s important to note that the below information is only one factor of many to consider when looking at the cost of your loan.

Tim Wu
Tim Wu

Head of Growth

Table of Contents

Understanding how the lender that you’re borrowing from calculates their interest rates will help ensure that you understand the total borrowing cost associated with your loan. Lenders use many different factors to calculate their total APR, and it’s important to note that the below information is only one factor of many to consider when looking at the cost of your loan.

When it comes to days in the month and year, there are three possible ways for your lender to calculate their interest rates. We’ll break them down for you.

30/360 - This calculation assumes that there are 30 days in each month, and 360 days in the year. Ultimately this calculation ends up costing the borrower the least amount of money because it charges borrowers on fewer days in the month and fewer days in the year, rather than on the actual days per month and per year.

Actual/365 or Actual/Actual- This calculation uses the actual number of days in the month, and the actual number of days in a year. This means, in comparison to 30/360 that the borrower is paying additional interest on 5 (or 6, depending on if it’s a leap year) days in the year. The good news is, it’s consistently the option with the accurate number of days in each month and in the year!

Actual/360 - This calculation uses the actual number of days in a month, and 360 days in a year. Ultimately this calculation ends up costing the borrower the most amount of money. Actual/360 allows a lender to quote what looks like a lower overall cost. However, these lenders charge interest on an extra few days per year meaning they still recoup the same amount as a higher interest rate, if not even more. The reason it costs the borrower even more than actual/actual is because it’s an extra 5 or 6 days added up across months and fewer days in the year.

Here is a table to help break down what this all actually means:

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