APR to True Interest Cost Calculator

APR to true interest cost: calculate the effective annual rate including fees

Lenders often advertise an APR that looks straightforward, but the real cost of borrowing can be higher once you include upfront fees and how those fees are charged. This APR to true interest cost calculator is built for one practical decision: comparing fixed-payment installment loan offers (personal loans and similar products) so you can choose the cheaper option on an apples-to-apples basis.

The key idea is simple. Two loans can share the same advertised APR yet cost different amounts because one includes a fee, or because the fee is financed rather than paid upfront. The true interest cost is best expressed as an effective annual rate that matches your actual cash flows: the amount you receive on day one, and the payments you make each month thereafter. That rate is what this calculator estimates.

Start with the loan amount, the advertised APR, and the term in months. If there is an origination or initiation fee, add it as the upfront fee. Then choose how the fee is charged: deducted from proceeds (you receive less), paid upfront (out of pocket), or added to the loan balance (financed). The calculator will compute your monthly payment based on the financed balance, then compute an effective annual rate that reflects what you actually received versus what you pay back over time.

Assumptions and how to use this calculator

• This calculator is for fixed-rate installment loans with equal monthly payments, not revolving credit like credit cards.
• The advertised APR is treated as a nominal annual rate with monthly compounding for the payment calculation.
• Fees are handled exactly as selected: deducted from proceeds, paid upfront, or added to the loan balance (financed).
• The “true annual cost” is computed from the implied monthly rate that makes the net present value of the cash flows equal to zero.
• Taxes, insurance, optional add-ons, penalty interest, and variable-rate changes are excluded to keep comparisons clean.

Common questions

Why can the true annual cost be higher than the advertised APR?

Because fees reduce what you effectively receive or increase what you effectively repay. If you borrow 50,000 but pay a 1,500 fee, your net benefit is closer to 48,500 (or you borrowed 51,500 if the fee is financed). Either way, the payment schedule is large relative to the value you got, so the implied rate goes up.

Is “deducted from proceeds” different from “paid upfront”?

In many real situations, both lead to the same net amount you benefit from on day one: loan amount minus fee. The difference is practical cash flow: with “paid upfront” you need cash in hand to pay the fee, while “deducted” reduces what you receive. The calculator separates them because people experience them differently, even if the effective rate is often similar.

What does “fee added to balance” mean for my payment and cost?

If the fee is financed, your payment is calculated on a higher balance (loan amount plus fee). You receive the full stated loan amount, but repay interest on the fee as well. This typically increases the true annual cost and the total repaid compared to paying the fee upfront.

Why does the calculator use an effective annual rate instead of just total interest?

Total interest and total cost are useful, but they can be misleading when comparing different terms or fee structures. An effective annual rate summarizes the time value of money across the whole repayment schedule. It helps you compare offers with different fees and terms using one number.

How can I improve accuracy if my loan is not a standard installment loan?

This tool assumes equal monthly payments and a fixed rate. If your product has variable rates, balloon payments, irregular fees, mandatory add-ons, or payment holidays, the true cost may differ. In that case, the best approach is to model the actual cash flows: what you receive at the start and what you pay on each payment date. This calculator is intentionally locked to the standard installment-loan comparison use case.