Building Your Business Business Financing Stated vs. Annual Percentage Rate By Rosemary Carlson Rosemary Carlson Rosemary Carlson is a finance instructor, author, and consultant who has written about business and personal finance for The Balance since 2008. Along with teaching finance for nearly three decades at schools including the University of Kentucky, Rosemary has served as a financial consultant for companies including Accenture and has developed online course materials in finance for universities and corporations. learn about our editorial policies Updated on September 1, 2022 Share Tweet Pin Email In This Article View All In This Article Stated Interest Rate Annual Percentage Rate How to Calculate the Stated Interest Rate How to Calculate Annual Percentage Rate Frequently Asked Questions (FAQs) Photo: Thomas Barwick/Getty Images Banks use multiple methods to calculate interest rates, and each method can change the total cost of the loan. The stated interest rate is the annual cost to borrow money reflected as a percentage. The annual percentage rate (APR) includes the interest rate as well as any additional fees charged by the lender or bank. Knowing how to calculate interest rates can help you better understand your loan contract and put you in a better position to negotiate your rate with your bank. Key Takeaways Bank loans often quote two interest rates, the stated interest rate and the annual percentage rate (APR).The stated interest rate is the annual cost to borrow money reflected as a percentage. The annual percentage rate (APR) includes the interest rate as well as any additional fees charged by the lender or bank. Stated Interest Rate The stated interest rate is the annual cost of the loan that a bank charges, expressed as a percentage. This interest rate does not take into account other costs associated with borrowing the money. Annual Percentage Rate The annual percentage rate (APR) is the actual amount you pay to borrow the money because it includes loan fees, closing costs, or other charges. Typically, when a bank quotes you an interest rate, it's quoting the annual percentage rate (APR). In fact, banks must quote the APR as mandated in the Truth in Lending Act (TILA). The annual percentage rate is the total cost of credit borrowing expressed as an annual rate. The APR is a broader metric because it includes the stated interest rate as well as any additional costs charged by the lender. As a result, the APR is usually higher than the stated interest rate unless there are no fees or additional charges by the lender. Note The Truth in Lending Act (TILA) requires banks to quote the loan's APR and the finance charge, which is the total dollar amount in interest and fees that you'll pay over the life of the loan, assuming you paid on time each month. How to Calculate the Stated Interest Rate If you borrow $1,000 from a bank for one year and have to pay an agreed $60 in interest for that year, your stated interest rate is 6%. Here is the calculation: Stated interest rate = Interest ÷ Principal= $60 ÷ $1,000 = 6% Your annual percentage rate or APR is the same as the stated rate in this example because there are no additional fees to consider. However, the $1,000 loan would be less favorable if you were charged $60, but you had only 120 days to repay the loan. Interest rate = Interest ÷ Principal X Days of the Year (360) ÷ Days Loan is Outstanding= $60 ÷ $1,000 X 360 ÷ 120 = 18% The interest rate would be 18% since you only have use of the funds for 120 days, but you're still being charged $60 for the period. How to Calculate the Annual Percentage Rate (APR) Using the earlier example, let's say you borrow $1,000 from a bank for one year and have to pay an interest rate of 6%. However, the bank also charges a $25 fee to process the loan. The stated interest is $60, as shown in the earlier example, but here's the calculation again. Stated interest rate = Interest ÷ Principal= $60 ÷ $1,000 = 6% The annual percentage rate would be calculated as follows: Annual percentage rate = (Interest + Fees) ÷ Principal= ($60 + $25) ÷ $1,000 = 8.5% Your annual percentage rate increased to 8.5% from 6% because of the loan processing fee. This difference is why it's important for borrowers to review and understand both the interest being charged but also any fees or additional costs added on by the lender. Although loan fees may appear innocuous at the onset of the loan, they can have a significant impact on the total cost of borrowing. Frequently Asked Questions (FAQs) What is the stated interest rate? The stated interest rate is a loan's annual cost charged by a lender, expressed as a percentage. Why is the annual percentage rate different from the stated interest rate? While the stated interest rate is the annual cost of the loan expressed as a percentage, the annual percentage rate (APR) is the actual amount paid because it includes the interest rate plus any fees or charges. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Consumer Financial Protection Bureau. "What is a Truth-in-Lending Disclosure? When do I get to see it?" Consumer Financial Protection Bureau. "What is the Difference Between an Interest Rate and the Annual Percentage Rate (APR) in an Auto Loan?"