If you are paying an APR of 6%, what is your monthly interest rate i?

Solution: The APR (Annual Percentage Rate) is the percentage charged annually for interest. Since the APR is a percentage it must be multiplied by .01 to convert the percentage to an interest rate in decimal form. In most problems in finance, the interest is compounded and paid quarterly, monthly, daily or some other period, so the annual interest must be divided by the number of periods in a year to get the interest rate per period.

The formula to convert the APR to the periodic interest rate i is

i = (APR * .01) / m where m is number of periods in a year.

For this example,

i = (6 * .01) / 12 or .005

Problem: How many monthly payments n are in a four year loan

Solution: If we are given the term in years, the total number of periods n is calculated by using the following formula where m is the number of periods in a year

n = term * m

So, for a 4 year loan, the number of monthly payments n is 4 * 12 or 48.