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How to Calculate Interest on a Loan

Loan Interest


Back in the old days, calculating the interest rate on a loan was something that required a pen, paper and a lot of time using a calculator in an attempt to understand how the lending institution arrived at the monthly payment figure. The internet has changed things and now it is much easier to calculate the interest rate on a loan.

  • Determine the principal. The principal is the amount of the face value of the loan before fees or interest is applied.Calculate loan interst rates
  • Locate the interest rate. If you’ve already signed the loan papers, look at the loan agreement papers to find the rate of interest. It is necessary in order to calculate the total interest. Paid above and beyond the principal.
  • Convert the term of the loan into months. If you’re taking out a five-year auto loan, the monthly term will be 60 months. Similarly, a 30-year mortgage loan converts to 360 months.
  • Find an online interest rate calculator such as this one from Bankrate.com. Whether you’re calculating the interest rate on an automobile loan, a mortgage loan or a personal debt consolidation loan, you can find an online calculator to calculate the interest. A simple loan calculator will handle the job. However, if you wish to play around with a few more parameters such as how paying points for a home mortgage loan can affect the monthly payment, then use your favorite search engine to for mortgage loan calculators.
  • Plug in the numbers. Now that you have the principal, the interest rate and the term in months, insert the appropriate information in the appropriate boxes and calculate your loan’s interest rate.

Tip

Play around with the loan calculator by slightly increasing and decreasing the interest and/or principal amount to see how it affects your monthly payments. It might be the ammunition you need to continue shopping until you find a lower interest rate.

Warning

The calculations above apply to a straightforward loan. If you have an adjustable-rate loan or a different loan type with a more creative interest rate structure, the above formats will not work for you.


About the author: Felicia A. Williams is a wife, mother, freelance writer and owner of Tidbits and Stuff.

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