APR

If the APR of an overdraft is 10.5% then does one merely divide by 12 to get the monthly repayment rate?

I know compound interest is involved...

Reply to
Andrew
Loading thread data ...

There is no monthly repayment with an overdraft.

Reply to
Doug Ramage

In message , Andrew writes

You cant say without without knowing how frequently the bank debits the accrued interest to the account. Some do it monthly, others quarterly. Also, the APR may include a one off arrangement fee. By 'repayment' do you mean how long it will take to repay then overdraft, or how much interest will accrue each month?

Reply to
john boyle

(1 + x) ^12 = 1.105 x= 1.008355

Assuming there were no other charges (not only the interest rate goes into computing the APR - see ) the monthly interest would be 0.84%.

Reply to
Guttorm Christensen

In message , Guttorm Christensen writes

That only works if the accrued interest as applied to the account monthly on the last day of the accrual period. Some banks still apply the inetrest quarterly about 21 days after the end of the quarter during which it accrued.

Reply to
john boyle

As the 10.5% is an APR then the monthly rate is indeed 0.84%. To get the quarterly rate either

1.008355^3 = 1.0253 so quarterly rate is 2.53% or 1.105^(1/4) = 1.0253 so quarterly rate is 2.53%

To answer the original question, no, you cannot divide an APR by 12 to get a monthly rate, although in some circumstances it may give a good approximation. You need to divide by 100 to convert from the percentage rate to a decimal rate, add 1 to the decimal rate, take the 12th root, then take

1 away. Multiplying by 100 converts from the decimal to the percentage rate. This will always give you a monthly rate equivalent to the APR quoted.

Be aware that banks often complicate things and may quote a typical APR. For example one of my credit cards quotes an APR on purchases as 11.5% saying this "comprises an introductory rate of 0% for the first six months followed by an ongoing rate of 13.9%". Obviously most customers will pay interest equivalent to an APR of more or less than 11.5%. Very few will actually have paid the 11.5% APR. To convert this APR to a rate for a single month would be silly. The rate for a single month will either be 0% or 13.9%.

Reply to
dp

This page will convert APRs to monthly equivalent rates.

formatting link

Reply to
dp

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.