Monthly vs Yearly Interest Rate: The Maths Most People Skip
A yearly rate divided by 12 gives the monthly rate, so 19.9% a year is about 1.66% a month. A monthly rate times 12 is not the full yearly cost: because interest is added to interest, 1.5% a month really costs about 19.6% a year.
What is the difference between a monthly and a yearly rate?
Yearly rate is the interest charged over one year, shown as a percentage of what you owe.
Monthly rate is the interest charged over one month. It is usually the yearly rate divided by 12.
They describe the same cost over different lengths of time. A monthly number is smaller only because the time is shorter. (New to this? Start with what is interest.)
How do you turn a yearly rate into a monthly rate?
Divide the yearly rate by 12.
Step 1. A card charges 19.9% a year. 19.9 ÷ 12 = 1.658% a month.
Step 2. You owe €4,200. 4,200 × 0.01658 = about €70 of interest this month.
That €70 is the number that matters most each month. It is what your payment has to beat before your debt gets smaller.
How do you turn a monthly rate into a yearly rate?
There are two answers, and the gap between them is the maths most people skip.
The quick answer is to multiply by 12. This gives the nominal yearly rate. 1.5% a month × 12 = 18% a year.
The true answer counts interest on interest. Each month, interest is added to what you owe. Next month, you pay interest on that bigger amount.
Effective yearly rate is the true cost over a year once interest on interest is counted.
Here is the formula in words: add 1 to the monthly rate, raise it to the power of 12, then take away 1.
For 1.5% a month: 1.015 to the power of 12 = 1.196. Take away 1, and you get about 19.6% a year.
So an offer of “1.5% a month” is not 18% a year. It is closer to 19.6%. Wikipedia’s entry on the effective interest rate shows the same pattern: 6% a year, added monthly, works out to 6.17%.
What does this look like with real numbers?
Say you owe €4,200 and make no payments for a year. Here are three ways to state the cost:
| How the rate is shown | Monthly rate | True yearly cost | Interest on €4,200 in a year |
|---|---|---|---|
| 19.9% a year | 1.658% | 21.8% | €916 |
| 1.5% a month | 1.5% | 19.6% | €822 |
| 19.9% simple (no compounding) | none | 19.9% | €836 |
Interest figures assume no payments and no new spending, with interest added monthly.
Two things stand out:
- The 19.9% card costs more than 19.9% once interest is added monthly. €916 is about 21.8% of €4,200.
- The “1.5% a month” offer sounds cheaper than it is. It costs about €822 a year, not €756 (which is 18%).
To compare offers fairly, turn every rate into a true yearly cost first. Then compare like with like. (More on this in simple vs compound interest.)
What is a daily rate?
Daily periodic rate is the yearly rate divided by the number of days in a year.
The US consumer regulator, the CFPB, explains that some card issuers work out interest daily. They divide the APR by 360 or 365, depending on the issuer. Interest is then added each day to the day before’s balance.
At 19.9% ÷ 365, the daily rate is about 0.0545%. On €4,200, that is about €2.29 a day.
€2 a day sounds small. Over 30 days, it is about €69. If interest is added every day, the true yearly cost of 19.9% rises to about 22.0%.
Why do small monthly numbers look harmless?
Because the time is short. A rate for one month, one week or one day is always a smaller number than the same cost for a full year.
The CFPB gives an example from short loans. A $15 charge on $100 is a 15% rate. Repaid in two weeks, that equals an APR of almost 400%. The cost did not change. Only the length of time it covered did.
The same is true for any rate. When you see a monthly, weekly or daily figure, turn it into a yearly one before you decide. (See APR explained.)
Do this today (10 minutes)
- Find the rate on each of your debts, and note whether it is per year, per month or per day.
- Turn each one into a monthly rate, then multiply by the balance to find this month’s interest.
- Turn any monthly rate into a true yearly cost: (1 + monthly rate) to the power of 12, minus 1.
Nada does this maths for you. Add each debt with its rate, and see your monthly interest and payoff date in one place. Get Nada
FAQ
How do I turn a yearly rate into a monthly rate? Divide the yearly rate by 12. A card at 19.9% a year charges about 1.658% a month. Multiply that by your balance to see this month’s interest. On €4,200, that is about €70. Some lenders work it out daily instead, so your real figure may be a little different.
How do I turn a monthly rate into a yearly rate? The quick way is to multiply by 12, which gives the nominal yearly rate. The true yearly cost is higher, because interest is added to interest. Use this: add 1 to the monthly rate, raise it to the power of 12, then take away 1. For 1.5% a month, that is about 19.6%.
Why is the effective rate higher than the stated rate? The stated yearly rate is usually split into smaller steps, like months or days. After each step, interest is added to what you owe. The next step charges interest on that bigger amount. This is compound interest. The more often it is added, the higher the true yearly cost becomes.
Is a monthly rate always cheaper than a yearly one? No. A monthly rate only looks smaller because it covers a shorter time. To compare two offers fairly, turn both into a yearly figure on the same basis. In the example, a 1.5% monthly offer costs about 19.6% a year, close to a 19.9% yearly card at about 21.8%.
Sources
Read in October 2026.
- CFPB: What is a daily periodic rate on a credit card?
- CFPB: What is an APR and why is it higher than the interest rate for my payday loan?
- Wikipedia: Effective interest rate (definition only)
Written by the Nada team. Reviewed October 2026.
This is general information, not personal advice.