You don’t need to be a bean counter to figure out the interest you owe on a loan, as the math is fairly simple. Be sure that you understand the method your lender uses to charge you interest, though. Some loans, like mortgages, use compound interest calculations, while others, like most bank loans, use simple interest calculations. The amount of interest accrued with a compound interest loan will change as you make payments toward the loan balance, while simple interest loans charge you a flat rate of interest over the life of the loan.
Mortgage Interest Calculations
Determine your current loan balance by deducting any scheduled or additional payments applied toward the principal since the beginning of the loan.
Divide your interest rate by the number of scheduled payments for the year. Use 12 for the number of payments if you make monthly payments, or 26 if you make bi-weekly payments. If your loan has a 6.0 percent interest rate and you make monthly payments, the calculation’s result is 0.5 percent.
Multiply the outstanding loan balance by the number that resulted from dividing the interest rate by the number of annual payments. A $100,000 loan balance at 6.0 percent interest with monthly payments would have an initial interest payment of $500, expressed as 100,000 divided by 0.5 percent (the result of 6 percent divided by 12).
Simple Interest Calculations
Prepare three simple pieces of information to complete the calculation: the amount of the loan, the interest rate and the period of time over which you will pay the loan back.
Calculate your total interest due on the loan by multiplying the loan amount by the interest rate and the duration of the loan. For example, a $10,000 loan at 5 percent interest over one year would accrue $500 in interest. A $10,000 loan at 5 percent interest over two years would accrue $1,000 in interest. Express months in decimals when calculating. A $10,000 loan at 5 percent interest over six months would accrue $300, which can be calculated as follows: 10,000 times 5 percent times .6.
Divide the total interest on the loan by the number of payments. A $10,000 loan at 5 percent interest over one year would have monthly interest payments of $41.67, expressed as $500 (the result of 10,000 times 5 percent times 1) divided by 12.
- Unlike a simple interest loan, the amount of principal accrued each month on a mortgage changes depending on the loan balance. Be sure to recalculate the interest payment each time you apply money toward the principal balance.
- Because of the way lenders calculate mortgage interest, making additional payments toward principal whenever possible will cut down on the amount of interest you will pay over the life of the loan.
- Loans with variable or adjustable interest rates may change their interest rates at set intervals over the life of the loan, significantly increasing or decreasing your monthly payments.
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