How to Calculate Interest Rate Payments

Interest is accumulated on top of a loan's principal balance.

Interest is accumulated on top of a loan's principal balance.

Interest, generally expressed as a percentage, is an amount added on to the principal of a loan or credit line that serves as an incentive for the lender to extend the loan. Interest is accrued on top of the principal loan balance at regular intervals, often monthly or annually. Knowing how to calculate interest payments can help to ensure that you are portioning off an adequate amount of your payments to the principal amount in each period.

Determine your total principal amount and interest rate. As an example, in a $100,000 loan at 5 percent interest, $100,000 would be your principal amount and .05, or 5 percent, would be your interest rate.

Determine how often interest is accrued. Loan interest is often expressed as an annual percentage, with a portion of the interest accrued each month. Some specialized loans, such as short-term cash advances, can accrue the full interest rate each month, rapidly boosting the loan balance over a short period of time.

Divide your annual interest rate by twelve to determine your monthly interest rate. In the example above, the monthly interest rate for a loan at 5 percent would be .4 percent, or .004.

Multiply the monthly interest rate by the principal amount to determine the interest accrued in the first billing cycle. In our example above, the interest accrued in the first month would be around $417.

Add the initial interest accrued to the principal amount to find the total amount due at the first billing cycle. Subtract your actual first payment from this amount to find your total due at the second billing cycle. To continue the example, adding the first month's interest to the initial principal brings the total amount due to $100,417. If you made a $1,000 payment, the new total balance would be $99,417.

Multiply the interest rate by the total amount currently outstanding to find the next interest accrual amount and then add it to the outstanding balance. For each subsequent payment period, subtract your last payment from the total due, calculate the new interest accrued, and repeat. To continue the example, the interest accrued in the second period would be $397 (99,417 x .004), for a total amount due of around $99,814. As you can see, taking interest into consideration, the total amount due has gone down less than $200 after one payment and two interest accruals. This is why is it vital to ensure that your payments are large enough to cover interest accruals with money left over for principal reduction.

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