Enter your loan amount, stated interest rate, term, and any origination fee to see the effective APR and the loan’s true total cost.
This tool calculates your monthly payment from the stated rate and term, then works out the effective interest rate you’re really paying once the origination fee reduces the amount you actually receive, while your payments stay based on the full loan amount.
Loan amount:
Stated annual interest rate (%):
Term (years):
Origination fee ($, optional):
How It Works
This tool calculates your monthly payment from the stated rate and term, then works out the effective interest rate you’re really paying once the origination fee reduces the amount you actually receive, while your payments stay based on the full loan amount.
How to Use This Tool
- Enter the loan amount.
- Enter the stated annual interest rate.
- Enter the loan term in years.
- Enter any origination fee charged upfront (leave blank for none).
- Click Calculate to see your effective APR and true total cost.
The effective APR shown here is always equal to or higher than the stated rate whenever a fee is charged, since you receive less money upfront but repay the same amount.
The Math Behind It
A standard fixed-rate loan payment comes from this formula:
Payment = L × r ÷ (1 − (1 + r)−n)
Here L is the loan amount, r is the monthly interest rate (the annual rate divided by 12), and n is the number of monthly payments. The origination fee does not change that payment, because it is based on the full loan amount. What the fee changes is how much cash you actually receive. The effective APR is the interest rate at which those same payments would repay the smaller amount you really got.
Worked example: borrow 20,000 at a stated 6% for 5 years with a 500 origination fee. The monthly payment is about 386.66, so you repay about 23,200 in total. You only receive 19,500 after the fee, so the true cost of borrowing is roughly 3,700: about 3,200 in interest plus the 500 fee. Solving for the rate that turns 19,500 into those 60 payments gives an effective APR of roughly 7%, about a full percentage point above the stated 6%.
Why the Stated Rate Is Not the Whole Story
Lenders advertise a stated interest rate because it looks small, but two loans with the same stated rate can cost very different amounts once fees are included. A fee taken out of the loan reduces the money in your hands while leaving the balance you owe unchanged. The shorter the loan, the fewer payments the fee is spread across, so it pushes the effective APR up further. This is why the APR figure exists: it is meant to give borrowers one number that captures both interest and required upfront fees so offers can be compared fairly.
How to Compare Loan Offers
- Compare APR to APR: Line up the effective APR of each offer rather than the stated rates.
- Look at total cost: A lower APR on a longer term can still cost more in total interest.
- Ask about all fees: Origination, application, and closing fees can each change the picture.
- Check prepayment terms: Some loans charge a penalty for paying early, which limits your ability to cut the cost.
Did You Know?
- The Truth in Lending Act in the US requires lenders to disclose APR precisely because a stated interest rate alone can hide the real cost of upfront fees.
- A seemingly small origination fee can meaningfully raise a loan’s effective APR, especially on shorter-term loans where fees are spread over fewer payments.
Frequently Asked Questions
Why is the effective APR higher than the stated rate?
Because the origination fee reduces the amount you actually receive while your payments are still based on the full loan amount, so you’re effectively paying interest on money you never received.
Does this account for other types of fees, like closing costs?
It accounts for a single upfront origination-style fee entered as a dollar amount; other recurring fees would need to be factored in separately.
What is an origination fee?
It is a one-time charge a lender takes for processing a loan, usually quoted as a percentage of the loan amount. It is commonly deducted from the money you receive, so a 20,000 loan with a 2.5% fee puts about 19,500 in your account while you still owe 20,000.
Why does a shorter loan raise the effective APR more?
The same fee is recovered over fewer months of interest payments. On a 1-year loan a fee makes a much bigger dent in the effective rate than on a 7-year loan, even though the dollar amount of the fee is the same.
Will my lender’s stated APR match this result?
It may differ slightly. Lenders follow specific disclosure rules and may include additional fees, so use your official loan documents for the final figure. This tool is a general estimate and not financial advice.