Learn How To Calculate Loan Interest
Understand different interest calculation methods, use our interactive calculators, and make informed decisions about your loans.
Understanding how interest works can save you thousands over the life of your loan
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Understanding Loan Interest
Interest is the cost of borrowing money, calculated as a percentage of the loan amount. Understanding how it works can help you make better financial decisions.
Simple Interest
Calculated only on the initial principal, which remains the same over time.
Learn moreCompound Interest
Calculated on the initial principal and on the accumulated interest over time.
Learn moreAmortization
A method of paying off both principal and interest in equal installments over time.
Learn moreWhy Understanding Interest Matters
Knowing how interest is calculated helps you compare loan offers, understand the true cost of borrowing, and potentially save thousands of dollars over the life of your loan.
Loan Interest Calculator
Use our comprehensive calculator to determine your monthly payments, total interest paid, and see a full amortization schedule.
Loan Information
Calculation Results
Monthly Payment
$299.71
Principal Amount
$10,000.00
Total Interest
$789.68
Total Repayment Amount
$10,789.68
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Simple Interest Calculation
Simple interest is calculated only on the initial principal, making it easier to understand and predict.
The Simple Interest Formula
I = P × r × t
I
Interest
P
Principal
r
Rate (decimal)
t
Time (years)
Example Calculation:
If you borrow $10,000 at 5% simple interest for 3 years:
I = $10,000 × 0.05 × 3
I = $1,500
Total repayment = $10,000 + $1,500 = $11,500
When Simple Interest Is Used
- Short-term loans and lending between family members
- Some car loans and personal loans
- Treasury bills and bonds
- Some types of savings accounts
Advantages of Simple Interest
- Easy to calculate and understand
- Lower total cost compared to compound interest
- Fixed interest amount regardless of payment schedule
- Predictable repayment amounts throughout the loan term
Compound Interest Calculation
Compound interest is calculated on both the initial principal and the accumulated interest, resulting in interest on interest.
The Compound Interest Formula
A = P(1 + r/n)^(nt)
A
Final Amount
P
Principal
r
Rate (decimal)
n
Compounding Periods per Year
t
Time (years)
Example Calculation:
If you borrow $10,000 at 5% compounded monthly for 3 years:
A = $10,000(1 + 0.05/12)^(12×3)
A = $10,000(1 + 0.004167)^36
A = $10,000 × 1.1616
A = $11,616
Total interest = $11,616 - $10,000 = $1,616
Common Compounding Periods
| Period | n Value | Common In |
|---|---|---|
| Annually | 1 | Bonds |
| Semi-annually | 2 | Some mortgages |
| Quarterly | 4 | CDs, 401(k)s |
| Monthly | 12 | Credit cards, mortgages |
| Daily | 365 | Some savings accounts |
Impact of Compounding Frequency
More frequent compounding periods result in higher total interest. Here's how the compounding frequency affects a $10,000 loan at 5% for 3 years:
Why Compound Interest Costs More
With compound interest, you pay interest on previously accrued interest, not just the principal. This results in higher total costs compared to simple interest, especially for long-term loans.
Understanding Amortization
Amortization is the process of paying off a loan with regular, equal payments that include both principal and interest.
How Amortization Works
In an amortized loan, each payment is split between interest and principal. Early in the loan, a larger portion goes toward interest, while later payments are mostly principal.
The Amortization Formula for Monthly Payment:
M = P × [r(1 + r)^n] / [(1 + r)^n - 1]
M
Monthly Payment
P
Principal
r
Monthly Interest Rate (annual rate/12)
n
Number of Monthly Payments
Amortization Schedule Example
Here's how payments are allocated in a $10,000 loan at 5% for 3 years:
| Payment # | Payment | Principal | Interest | Balance |
|---|---|---|---|---|
| 1 | $299.71 | $258.04 | $41.67 | $9,741.96 |
| 6 | $299.71 | $269.25 | $30.46 | $8,026.55 |
| 12 | $299.71 | $282.94 | $16.77 | $6,710.11 |
| 24 | $299.71 | $294.15 | $5.56 | $3,339.38 |
| 36 | $299.71 | $298.46 | $1.25 | $0.00 |
Common Amortized Loans
- Mortgage loans
- Auto loans
- Personal loans
- Student loans
- Home equity loans
Benefits of Amortization
- Predictable payment amounts throughout the loan term
- Gradual reduction of the principal balance
- Building equity in financed assets like homes
- Clear loan payoff date established at the start
- Easier budgeting with fixed payment amounts
Frequently Asked Questions
Get answers to common questions about loan interest calculations.
What is the difference between APR and interest rate?
The interest rate is the percentage of the loan charged for borrowing money. APR (Annual Percentage Rate) includes the interest rate plus additional costs like fees and other charges, giving a more comprehensive cost of borrowing.
How do I calculate simple interest on a loan?
Simple interest is calculated using the formula: Interest = Principal × Rate × Time (where rate is in decimal form and time is in years). For example, a $1,000 loan at 5% for 2 years would generate $100 in simple interest (1000 × 0.05 × 2).
What factors affect the interest rate I'm offered?
Factors that affect your interest rate include: credit score, loan term, loan amount, current market rates, income level, debt-to-income ratio, and loan type. Generally, a higher credit score and shorter loan term result in lower interest rates.
Can I reduce the total interest I pay on my loan?
Yes, you can reduce total interest by making extra payments toward the principal, refinancing to a lower interest rate, choosing a shorter loan term, or making bi-weekly instead of monthly payments.
How does compound interest differ from simple interest?
Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest. Compound interest results in higher total interest over time compared to simple interest.
What is an amortization schedule?
An amortization schedule is a table showing how each loan payment is applied to both principal and interest, and how the loan balance decreases over time. It details every payment throughout the loan term, showing exactly how much goes to interest versus principal.
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