Interest rates are quoted per year, but bills, statements and budgets are monthly. Turning an annual rate into a monthly interest amount is straightforward once you know which kind of rate you have.
The basic method
Monthly interest = balance × annual rate ÷ 12
- Convert the rate to a decimal: 3.9% → 0.039.
- Divide by 12 to get the monthly rate: 0.039 ÷ 12 = 0.00325.
- Multiply by the balance.
Example: $5,000 in savings at 3.9% earns 5,000 × 0.00325 = $16.25 in a month.
For loans and credit cards
The same formula gives the interest part of a loan payment. A $8,000 credit card balance at 18% APR:
8,000 × 0.18 ÷ 12 = $120.00 of interest for the month.
On a mortgage or car loan, the rest of your payment reduces the principal, so next month’s interest is a little lower. On a credit card, if you pay less than the interest, the shortfall is added to the balance and compounds.
If you have an APY instead
An APY already includes compounding, so dividing it by 12 slightly overstates the monthly rate. Use:
Monthly rate = (1 + APY)1/12 − 1
A 4.5% APY becomes (1.045)1/12 − 1 = 0.3675% per month, so $5,000 earns about $18.37 in the first month (rather than $18.75 if you divided by 12).
Daily-accrual accounts: months are not equal
Many banks and card issuers calculate interest daily using a daily rate (annual rate ÷ 365) and charge or credit it monthly. Then the monthly amount depends on the number of days:
| Month length | Interest on $8,000 at 18% |
|---|---|
| Simple ÷ 12 method | $120.00 |
| 30-day month (daily accrual) | $118.36 |
| 31-day month (daily accrual) | $122.30 |
That is why your statement’s interest moves around even when the balance stays the same.
Interest over several months
If the interest stays in the account, each month’s interest is calculated on the new balance:
Balance after k months = P × (1 + r/12)k
$25,000 at 4.8% earns $100.00 in month 1, $100.40 in month 2, and $1,226.76 over a full year. If you withdraw the interest each month, you earn the same $100 every month — $1,200 a year.
Common mistakes
- Applying the annual rate to a single month (12 times too much).
- Dividing an APY by 12 when precision matters.
- Ignoring the day-count method on statements.
- Forgetting that loan balances fall with each payment.
The Monthly Interest Calculator builds a month-by-month table for any balance and rate. For the bigger picture, see How Does Monthly Compounding Work?