Interest Rate Calculator

With the interest rate calculator, you can compute the interest rates for loans with fixed terms and monthly payments. Suppose a vehicle dealer provides monthly payment and total price information but does not include the real interest rate. In that case, the calculator can still compute interest rates. Try the Interest Calculator or the Compound Interest Calculator to determine how much interest you’ll earn on an investment.

What is the Interest Rate?

It is also known as the cost of borrowing money. The interest rate is the amount lenders charge borrowers for using money, expressed as a percentage of the principal, or original loan amount. A yearly interest rate of 8% on a $100 loan means the borrower must pay back $108 at the end of the year.

The interest rate directly affects the total interest paid on the loan. Interest rates can be given in many ways, such as annually, monthly, daily, or at other time intervals. Most people prefer low interest rates because it will cost less to borrow. And lenders (or investors) prefer high interest rates because they can make more money from loans.

Interest rates play a role in practically all formal lending and borrowing transactions. Interest rates include mortgage interest rates, charges on outstanding credit card debt, loans to finance capital projects, pension fund growth, depreciation of long-term assets, price reductions given by a supplier to a customer for paying an invoice early, etc.

Simple vs. Compound Interest

You can calculate interest in two ways. Simple interest is calculated only as a percentage of the principal amount owed. When calculating compound interest, we must take all accumulated interest into account. The interest received by creditors is compounded because of this compounding property. The more interest is compounded, the more interest will accrue at a particular time.

We can use compound interest in modern formal interest calculations, including this calculator. And unless otherwise noted, all further references to the interest rate will refer to compound interest.

To calculate values or learn more about compounding frequency changes, use the Compound Interest Calculator.

Fixed vs. Variable Interest Rates

The interest rate on a loan with a fixed interest rate will never change. Variable rates are the interest rates that change over time. Interest rates, inflation, and stock market indices can affect the variation. The Interest Rate Calculator will only show the outcome as a fixed interest rate, despite each having advantages and disadvantages.

APR

APR (Annual Percentage Rate) is a standard statistic for expressing interest rates on different loans. We often use APRs when buying a home or a car. They differ from standard interest rates in that they might include additional expenses. For example, when purchasing a new automobile, administrative costs are sometimes folded into the financing of the loan rather than paid beforehand. The annual percentage rate can better compare similar products than the interest rate since it provides a more realistic picture of the costs involved.

Annual Percentage Yield, or APY, is the interest rate usually earned on a savings account or certificate of deposit at a financial institution (in the United States). Please visit the APR Calculator for additional information or to do APR calculations.

The Impact of Unpredictable Economic Conditions on Interest Rates

For mortgage and car loan interest rates, several variables come into play. Although most of these factors are beyond our control, we may still benefit from awareness.

Economic Policy and Inflation

A central bank’s monetary policy is the primary factor influencing interest rates in most industrialized countries. Prices of products and services are rising while money’s purchasing power decreases, a phenomenon known as inflation. The primary goal of monetary policy is to keep inflation under control.

Adjustments to interest rates are a powerful macroeconomic tool that can have profound effects on the economy. The Federal Reserve's Federal Open Market Committee (FOMC) gathers several times a year—up to eight—to review and determine the federal funds rate, which influences U.S. interest rates. The FOMC aims to manage inflation and maintain it at a target rate, typically around 2% annually, as part of its dual mandate to foster maximum employment and price stability.

Economic Activity

Rising interest rates reduce consumer confidence and the number of people and companies willing to borrow. When interest rates go down in the economy, borrowing money to expand a business, buy a new car, or buy a house becomes more common. This will lead to more employment, higher wages, and consumer confidence in the economy.

Central banks employ interest rates as one of their most important weapons for regulating the economy. Central banks usually decrease interest rates when the economy is weak and raise them when it is growing too quickly.

Unemployment Rate

High unemployment generally leads to decreased consumer spending, which can slow down economic growth. Conversely, low unemployment can stimulate increased spending, potentially driving up wages and business costs, which may lead to inflationary pressures. Consequently, central banks often adjust interest rates in response to changes in the unemployment rate to maintain economic stability.

Typically, central banks may lower interest rates during periods of high unemployment to encourage borrowing and spending, thus stimulating economic activity. Conversely, to prevent the economy from overheating when unemployment is low—which can be indicative of robust consumer spending and economic vitality—interest rates may be increased to moderate spending and keep inflation in check. This reflects the countercyclical role of monetary policy in managing economic fluctuations.

Supply and Demand

The credit market is determined by supply and demand in the same way as the market for goods and services, although to a lesser extent. Lenders raise interest rates when there is an excess demand for money or credit. Lenders decrease rates to attract more borrowers when there is less demand for credit or money. Banks and credit unions still have to meet their reserve requirements, and there is a maximum amount they can lend.

Controllable Factors Influencing Interest Rates

Even though many things that affect interest rates are hard to predict, people can have some effect on their rates.

Individual Credit Position

Credit scores and reports are available in the United States for lenders to measure risk. The higher a person’s credit score ranges from 300 to 850, the more creditworthy they are as borrowers.

The average credit score of American consumers is 700. Over time, consumers build a good credit score through regular payments, minimal credit use, and other metrics such as credit utilization ratio. If a consumer misses or fails to make payments, has a high credit utilization ratio, has a large total debt, or goes bankrupt, their credit score decreases.

To qualify for better interest rates, you must have a credit rating of at least 750. Those with higher credit scores are likely to get lower interest rates. Low credit scores, bankruptcy, and missed credit card payments make lenders wary of lending money to such applicants. They prefer to lend to people with a spotless record of on-time mortgage and car payments.

Companies either deny or raise interest rates to protect themselves from loan defaults by high-risk borrowers. A credit card firm may raise the interest rate on an account if the customer has a history of missed payments.

Real Interest Rate

The relationship between the real interest rate, inflation, and the nominal interest rate is often approximated by the equation:

Real rate + Inflation = Nominal rate

This formula suggests that the nominal interest rate, the rate commonly referred to in financial contexts, is the sum of the real interest rate (the rate adjusted for inflation) and the expected inflation rate. However, it's important to note that this is a simplification. The more comprehensive Fisher equation, which accounts for the compounding of interest, is given by:

1 + Nominal rate = (1 + Real rate) × (1 + Inflation rate)

For low rates of inflation and interest, the simple addition used in the approximation is generally adequate. Nonetheless, when dealing with higher rates or more precise financial calculations, the full version of the Fisher equation should be employed. For detailed calculations, especially over longer periods or with significant inflation rates, please use the Inflation Calculator, which can give a more accurate analysis.

How to Receive Better Interest Rates

A person's credit history is one of the most important things affecting whether they get reasonable interest rates. But there are other things borrowers should think about as well.

Loan specifics

More extended repayment periods are riskier for lenders, resulting in a higher interest rate. The interest rate may decrease if a borrower chooses a shorter loan term and puts down more money. The interest rate can increase for the borrower if the down payment is too low, which is also risky.

Secured loans

Because of the lack of collateral, unsecured loans have higher interest rates than secured loans. Secured loans provide lower interest rates for borrowers who are willing to put up security. If the borrower cannot pay, the lender is entitled to the collateral used as security.

Borrow when the market is favorable

Borrowers cannot change economic conditions but can take out loans when the market is promising. Lower interest rates can be seen when the economy is weak and there is less loan demand.

Do not apply for credit too often

If a high-risk borrower’s credit report shows a lot of inquiries, it means they may have trouble getting credit. Even a single query might lower your credit score by many points.

Do your homework and shop around

Interest rates offered by different lenders vary. Getting a reasonable rate and considering extra costs and conditions is essential. It is quite possible, as a bargaining tool, to announce to each lender that the other is providing a lower rate. A borrower might save money by shopping around for loans rather than taking the first one that comes their way.