How to Calculate Effective Annual Interest Rates for Installments on a Loan
- 1). Divide the interest paid on your installment by the balance of your loan to find the periodic interest rate expressed as a decimal. For example, if you paid $13 of interest for the month when you owed $900, you would divide $13 by $900 to get 0.0144444444444444.
- 2). Add 1 to the periodic rate. Here, you would add 1 to 0.0144444444444444 to get 1.0144444444444444.
- 3). Raise the step 2 result to the number of installments per year. Here, since the payments are monthly, you would raise 1.0144444444444444 to the 12th power to get 1.18778878.
- 4). Take away 1 from the step 3 answer to find the effective annual interest rate shown as a decimal. Here, you would take away 1 from 1.18778878 to get 0.18778878.
- 5). Compute the interest rate expressed as decimal times 100 to change it to a percentage. Finishing the example, you would multiply 0.18778878 by 100 to find the effective annual interest rate equals about 18.78 percent.
Source...