How To Calculate Interest on a Loan
When you borrow money from a financial institution, the personal loan balance isn’t just the total amount you secured but it will also include what you have to pay in interest. Depending on the type of loan, your interest payments and interest rates can be determined by such factors as your credit score and repayment terms. If you are looking to borrow and want an idea of your loan terms and monthly payments, it is good to know how to calculate interest on a loan.
How To Calculate Interest on a Loan: Simple Formula
You don’t need a loan calculator to figure out what the interest on your loan will be. You can simply follow this formula.
Interest = principal loan amount x loan term x interest rate
By using this formula, you can figure out what your monthly installments will look like. You can also figure out how many payments are left before you are paid in full.
Calculating Amortizing Interest
With amortized loans, you are required to make regular periodic payments that are applied to both the principal and interest. Here are steps you can take to calculate amortizing interest on a loan:
Step 1: Divide your interest rate by the number of payments you’re making in a year. For example, if you have a 4% interest rate and you make 12 monthly payments per year, you would divide 0.04 by 12 to get 0.0033.
Step 2: You then multiply your result, or in this instance 0.0033, by your remaining loan balance to find out how much you’ll pay in interest that month. In other words, if you have a $10,000 loan balance, your first month of interest would be $33.
Step 3: Subtract that interest of $33 from your fixed monthly payment to see how much in principal you will pay in the first month. If your lender has told you that your fixed monthly payment is $500, you will pay $467 toward the principal for the first month. That amount gets subtracted from your outstanding balance.
4 Things That Affect How Much Interest You Pay
Interest rates are determined by several factors. From your credit history to your student loan payments, your unique financial situation will reflect what options you have. Here are four areas to focus on when securing a loan and figuring out how much interest you’ll pay:
Credit score: If you have the time, try and get the best credit you can before applying for a loan. Better credit scores and history will help you get lower interest rates. One way you can improve your credit is by paying your credit card bills consistently on time.
Loan amount: The total amount you borrow, not including interest, is the loan amount, also referred to as the principal amount. Typically, the more you borrow the more interest you pay.
Loan term: This is the length of time over which your lender agrees to let you repay the loan. For example, mortgages are commonly a 30-year loan term, which means you stretch out your payments over 30 years.
Repayment schedule and amount: Generally your repayment schedule will be on a monthly basis. But if you opt to make more frequent payments such as biweekly, you could lower your rates and save some money. This will also decrease your repayment amount which is the total amount you pay each installment.
Final Take To GO
Knowing the total you’ll actually be paying on a loan comes down to the brass tax of understanding how much interest will be added to the principal amount, and why you’ll be paying that amount. By learning how to calculate interest on a loan, you can better set yourself up for a successful budget and repayment plan. Be sure to research what loan and lender best suits your current needs.
FAQ
Here are some answers to frequently asked questions about how to calculate interest on a loan.
What is the formula to calculate interest on a loan?
To calculate interest on a loan, multiply the principal amount, loan term and interest rate.
How do you calculate monthly amortized interest?
To calculate amortization, you need to divide your annual interest rate by 12, and you'll also need to multiply the number of years in your loan term by 12.
P = Principal; r = Rate of interest; t = Time in terms
Interest = P x (r/t)
How do you calculate 4% interest on a loan?
To calculate interest, you need to know variables such as interest rate, principal loan amount and loan term. So if you had 4% interest on a $100,000 mortgage loan, and your loan term was 30 years you would follow this formula:
$100,000 x 30 x 0.04 = $120,000.
What is the easiest way to calculate interest?
The easiest way to calculate interest is by following the simple interest formula:
Interest = principal loan amount x loan term x interest rate
This article originally appeared on GOBankingRates.com: How To Calculate Interest on a Loan
