# Calculate Monthly Interest

Updated May 16, 2016

Knowing how to calculate interest month-by-month is an essential skill. You’ll often see interest rates quoted as an annual percentage. but sometimes it’s more helpful to know exactly how much that adds up to in dollars and cents. Whether you’re paying interest on a loan or earning interest on a savings account, the process of converting from an annual rate to a monthly interest rate is the same.

### Divide by 12

To calculate a monthly interest rate, divide the annual rate by 12 to account for the 12 months in every year.

This is shown in Step 4 of the example below.

**Example:** assume you pay interest monthly at 10% per year. What is your monthly interest rate and how much will you pay (or earn) on $100?

- Convert the annual rate from percentage to decimal format (by dividing by 100)
- 10/100 0.1 monthly
- Divide the annual rate by 12
- .10 / 12 .0083
- Calculate the monthly interest on $100
- .0083 x $100 $0.83
- Convert the monthly rate in decimal format back to a percentage (by multiplying by 100)
- .0083 x 100 0.83% annually

### More Details

The example above is the most basic way to calculate monthly interest rates and costs *for a single month*. But you might want a bigger-picture view of your finances. With many loans, your loan balance changes every month:

**With auto, home, and personal loans**. you gradually pay down your balance over time, usually ending up with a lower balance each month. That process is called amortization, and an amortization table helps you calculate (and shows you) exactly how much you pay in interest every month.

Over time, you’ll notice that your monthly interest costs decrease – and the amount that goes towards your loan balance *increases* .

Home loans can be complicated, so it’s best to use an amortization schedule to understand your interest costs.

You might know the APR on your mortgage, but APR can contain additional costs besides interest costs (such as closing costs).

**With credit cards,** you can add new charges and pay off debt numerous times throughout the month. That can make calculations cumbersome, but it’s still worth knowing how your monthly interest adds up. In many cases, you’ll 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, interest is charged daily (so you calculate a daily interest rate – not a monthly rate).

For an example of how monthly interest charges and payments affect your credit card balance, see this tutorial .

**With bank accounts**. interest might be credited to your account monthly, daily, or quarterly. You’d use the same calculation to convert to a monthly interest rate and multiply the rate by your account balance. Be sure to use the interest *rate* in your calculations – not the annual percentage yield (APY) .

APY accounts for compounding, and will give an inaccurate result (unless you just want to know your annual earnings on a savings account with no additions or withdrawals).

### Periodic Rates

As you can see, interest can be calculated monthly, daily, annually, or over any other time period. Whatever time period is used, the rate you’ll use for calculations is called the *periodic interest rate*. You’ll most often see rates quoted in terms of an annual rate, so you’ll need to convert to whatever periodic rate matches your financial product.

Converting to a daily rate is similar to converting to a monthly interest rate. Instead of dividing by 12 for a monthly rate, you’ll divide by 360 (or 365, depending on your bank) for a daily rate.

Now that you know how much you’re paying each month, you can see how much you’d save by paying off debt early .