Step by step guide on how loan interest is calculated

Step by step guide on how loan interest is calculated 1

It not funny a lot of people who collect loan from loan companies do not know how loan interest is calculated.

 

Maybe some use the loan interest calculator, but I am must confess, it not fair if you borrowed some money but you are unable to know how is interest calculated monthly.

You should make everything transparent to you!

Step by step guide on how loan interest is calculated 2

This article calls for you knowing how loan interest is been calculated…

Maybe you don’t know, the loan repayment calculator has been programmed. Even if there is going to be a mistake somewhere, it will keep on bringing the same answer. Since it has not choice, than to listen to its master (the programmer).

 

You should be getting the best here, as the author is a favorite fan of mathematics.

If you never love mathematics, I mean if mathematics is one of those courses you tag as your worst enemy, I bet you will not regret reading this article.

This article on how loan interest is calculated is mostly for investors who never love mathematics, because I will be taking my time to explain everything in details.

I only need the mathematical knowledge to calculate interest on loan, but as a visitor here, you need 0 knowledge in mathematics.

Since you can affirm the fact that 1+1=2!

If you are about taking a loan from bank or Loan Company, we will advise you take your time and read step. It will do you more of good and no pitch of bad.

 

You think we should be guiding ourselves through the common term in loan and its interest; it is one of those things you should get familiar with before getting on the track on how loan interest is calculated.

 

Going through how to calculate interest on loan without knowing the keywords and terms used on interest and loan will be some kind of confusing…

 

Why confusing?

We are going to be making the use of some those terms while doing the loan interest calculation in here, so we believe you should have known the common term used while talking about loan.

But if you got no idea on the terms used in loan, then you have gotten no problem.

That is the reason we have taken our time to touch the relevant aspect before we teach you how loan interest is calculated.

Step by step guide on how loan interest is calculated 3

 

What is Loan?

Possibly, you might be stuck somewhere, you need money to fix things properly and let it go smooth again.

Hello, maybe you should consider getting a loan from banks or loan companies….

 

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What the heck is loan!

Loan is just an amount of money borrow from someone (mostly from a formal sources like banks), for a temporary duration which is paid back at an agreed time.

But there is something which might not be interesting about loan; it is paying back with interest.

So definitely, you have to get a loan from the loan companies when you are sure of making a huge return of money.
Be sure you will be able to pay back at the given time agreed, that is one reason you don’t have to get a loan because you want to purchase a car.

 

You know it will not give you a return, cool motives like using the money to run businesses will eventually bring about higher income in return and earn you some cash.

 

What is loan interest?

Not all loan givers ask for interest at the end of the loan duration, some just give you the principal amount and expect you to give them back the same amount in little month time.

What is principal amount? We will be explaining this in the upcoming paragraph.

So what is interest?

Interest is the amount added to the money been lend to individual, in other words, it is what you will pay back to the loan companies and this is simply the gain of all loan company.

Step by step guide on how loan interest is calculated 4

So the question is how is loan interest calculated, well loan interest is been calculated by some simple formulations, it will not be fair if the bank just add some amount (interest) to the capital you borrowed and you don’t know how it got there, you can’t independently calculate the interest on loan you were given.

Common terms on loan and its interest

Principal amount

This is the amount which the loan companies borrows you, most companies do not give you a loan until they are convince of what you will be doing with the money.

They want to know if the reason you are seeking for a loan will yield or not before they can agree on loaning you.

Interest rate

Interest rate is the percentage that defines how much interest you going to pay on a loan from loan companies or banks.

This is one of those things you should know before getting a loan,

just an hint before we move on!

It is advisable not to borrow loan if the rate is more than 10%, provided you want to utilize the loan you collected very well.

Some loan companies will charge you 30%, some 25%, but if you know how loan interest is calculated, I am sure you will not go for that offer. Just be thoughtful while getting a loan with a high rate, because the higher the interest rate, the higher the money you are going to pay back in return.

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Simple interest

This is the extra charges you will be paying after am agreed time while using the loan, maybe you signed an agreement with a loan companies with a particular interest rate, the rate will determine the simple interest which is the addition fee you are to be paying to bank after the duration is over.

Let work out a practical example here:
Let say you were lend a principal amount of $10000, at the end of the year, you are to pay back $10090.

Here, the additional fee is the simple interest, so how do we calculate the simple interest?

It is simple; we are going to be deriving a simple formula for it now.

Formula for simple interest

 

Simple interest = amount paid back – principal amount

Using this expression above to explain, we can deduce that $10000 is the principal amount, and $10090 Is the amount paid back.

So when applying that formula above to calculate simple interest. We get:

Simple interest = $10090 -$10000 = $90

From the above solution we can decide that the simple interest is $90

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Step by step guide on how loan interest is calculated 5

Time

This is the duration given to you by the loan companies, it is usually recorded in years, only few are recorded in months.

So you have to work hard to get the loan companies their money on or before the agreed time

Collateral

Collateral is a valuable material you use in replace of the money you borrowed from the loan company, this is how it works.

The bank is so smart that they know if they give you loan without collateral, you might eventually find your way out of their sight without giving them back a dime.

So before you collect a loan from the bank, they ask you if you have a valuable material you can use in replace, it is mostly inform of land, house, car, company and so on.

Once you tell them you have, the bank will make research on it in other to be sure that you own it. Once you are unable to pay back after an agreed time, you lose that collateral to the loan companies.

This is a mean of paying back your debt even though you fail…

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How to calculate interest on loan

Calculating the percentage first.

This is the first thing you should know, how to calculate percentage, the loan company might be straight forward and tell you the interest is 50%. That is actually simple; you don’t have to go a long way before you know the additional charge you are paying back with.

You might be lost when your fellow say, calculate the 50 percentage (50%) of $300.

We know mathematical genius are here but pardon us, we have to take it step by step, from the simplest to the complex so that everybody follow this can find it useful.

Step by step guide on how loan interest is calculated 6

50% of $300 simply means half of $300, which is $150, but there is a simple formula for calculating the percentage. We will be taking that in no time.

So if your loan company is imposing an interest of 50%, you should know it is not a good place to get loan from, as you will be paying back $450.

Note that the time give to pay back might also depend if the loan is favorable or not. That is why we are going to be using the standard formula for calculating interest on loan in the other phase of calculation.

Ok, what if the loan company imposes an interest of 10% of $350, it is obvious the interest is not the half of $350 since it is no more 50%.

Therefore, 10% of 350 will be calculate as follow:

10/100 multiply by 350..

Logically, the only thing that changed there is the “of’’ which is the multiplication sign

So, 10/100 *350 = 35

This means for every $350 collected as loan, you pay additional $35 as interest, and this is still cool.

Definitely, you will be paying the sum of $385 after the agreed duration.
So, the above calculation is just for you to know how to calculate percentage of a given amount.

How is interest calculated on loan?   Using the standard formula

Using a more acceptable and simple method of calculating interest on loan, we will be guiding you through the formula to calculate interest on loan using the above term we have discussed.

Mind you, we will be making it so simple with practical examples.

Standard formula for how loan interest is calculated

Simple interest =principal *rate* time/100

Example 1: So provided you went to Loan Company to get loan of $5000, and you are given the requirements below.
Time = 2 years
Rate = 10%

From the terms discussed above, we can say the amount lend by the loan company is the principal; hereby means the $5000 borrowed is the interest.
Applying these parameters in the formula, we get:

Simple interest = 5000* 10* 2/100 = 100000/100 =1000

Therefore, the interest on the loan of $5000 will be $1000; this implies that you will be paying back a sum of $6000 at the end of 2 years

For proper understanding on how loan interest is calculated, we will be moving to the second example

 

Example 2: Mr. Ben went to a bank to get some loan of $12000 for his business, the bank made it clear that he will be paying back in one year with the rate of 20%. What interest is Mr. ben paying?

From the parameters above, it is clear that the principal is $12000, duration of 1 year with the rate of 20%. Using the formula which says:

Simple interest =principal *rate* time/100

Therefore simple interest = 12000* 20* 1/100 = 240000/100 = 2400

The interest on the loan of $12000 Mr. Ben borrowed will be $2400; this implies that he will be paying back a sum of $14400 at the end of 1 years.

Conclusion

We believe this article has done more of good to you in letting you know how loan interest is been calculated, with this, you don’t even need a Loan repayment calculator.

We discussed about the terms used in loan and interest which we believe had really done a great job. With this, how is interest calculated on loan should not be a problem at all.

You then can make a wise decision while seeking for a loan.

If this article on how loan interest is calculated helped you, make sure you like, comment and share to your love ones.

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