The easiest way to convert annual interest rate to monthly rate is to divide the annual rate by 12.
For example, if your annual interest rate is 12%, the equivalent monthly rate is 1% (12 ÷ 12 = 1).
Why Do We Convert Annual to Monthly Interest Rates?
Lenders, credit card companies, and mortgage providers often advertise interest rates annually (APR).
However, payments are usually made monthly, so you need the monthly equivalent to calculate actual costs.
What Is the Formula to Convert Annual to Monthly Rate?
| Conversion Type | Formula | Example (12% Annual) | Result |
|---|---|---|---|
| Simple Division | Annual ÷ 12 | 12 ÷ 12 | 1% |
| Compound Conversion | (1 + Annual)^(1/12) – 1 | (1+0.12)^(1/12) – 1 | 0.95% |
💡 Tip: Use the compound method for loans, mortgages, or credit cards, where compounding is applied.
Step-by-Step: How to Convert Annual Interest to Monthly
- Identify your annual interest rate (APR).
- Decide if you need a simple or compound calculation.
- Apply the correct formula:
- Simple: Annual ÷ 12.
- Compound: (1+r)1/12−1(1 + r)^{1/12} – 1(1+r)1/12−1.
- Convert to percentage by multiplying the result by 100.
- Use the monthly rate to calculate payments or costs.
FAQ
1. What is the monthly rate for 24% annual interest?
Using simple division, 24% ÷ 12 = 2% monthly.
2. How do banks calculate monthly interest from APR?
Most banks use the compound formula, meaning your actual monthly rate is slightly less than simple division.
3. Is monthly interest just annual interest divided by 12?
Not always—simple division is approximate, but compounding gives the accurate rate.
4. How can I calculate monthly interest on a loan?
Take your loan balance × monthly interest rate = interest charge for that month.
5. Why does compound conversion give a different result?
Because compounding accounts for interest on interest, giving a more precise measure of monthly costs.
Also see: Convert money factor to interest rate