Banking Basics: How to Calculate Monthly Interest
By Justin Pritchard - Updated April 1, 2024
By Justin Pritchard - Updated April 1, 2024
Calculating interest month-by-month is an skill. You often see interest rates quoted as an 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.
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 format to 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?
Your monthly interest rate is
Want a spreadsheet with this example filled in for you? See the free Monthly 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 costs for 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:
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 balance increases.
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 costs besides 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 an average 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).
Note Be sure to use the in your calculations—not the annual 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.
What is a good interest rate for a credit card?
The average credit card interest rate was 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.
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