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How to calculate interest on a loan

How to calculate interest on a loan? Before this question, you must know why a bank charges interest? To get an idea about loan interest you need to go through the article.

When we take loans from banks or any lender, Then you need to return more money than you have taken from the bank. Actually, the banks charge some percentage of money as an interest

How to calculate interest on a loan
interest on a loan

This Interest percentage could be anything that you have signed an agreement with the bank. The interest rate will be charged in the total amount of the loan for a particular time.

Why a bank or lender charges interest?

The banks and lenders charge interest because it is a source of revenue for them and also they are providing you the banking services and also take risks when providing someone loan.

However, the banks charge interest for their revenue but you should also need to calculate the total repayable amount and the interest which is the bank’s charges to you. Interest totally depends on your loan interest rate, principal loan amount, and tenure of your loan.

To earn maximum profit banks might offer you different schemes and also will approach.

So, before taking a loan, calculate your interest amount.

Now, coming to the main point that how to calculate interest on a loan?

Calculating interest is simple but it will be tougher when you add some type of loan interest and it will be required big calculations.

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How to calculate interest on a loan

The main formula for calculating interest is as follows:-

Interest amount = Principal loan amount x {Interest rate ÷ 100 (in %)} x Time (in years)

You can also symbolize as R = P x I÷100 x T

Where R = Total Interest rate

P = Principal amount

I = Interest rate

And T = Time.

E.g. Total amount borrowed $10,000 with 10% interest rate for 2 years

Then, P = 10,000

I = 10

T = 2

R (Interest rate) = 10,000x{10÷100}x2

                              =10,000×0.10×2

                              = 2,000

So, The interest will be $2,000

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Identify loan type

The above-mentioned interest is simple but many banks charge interest which is more complicated. You need to figure it your loan interest type whether it is only an interest loan or an amortized load.

How to calculate interest on a loan

Amortized Loan: It is a type of loan where it requires regular monthly payments. A part of the amount every month which you have paid for the loan installments goes toward the principal of the loan and another portion of the amount goes to interest.

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When a loan is based on interest only then the above formula of interest will be helpful but when it comes to amortized loans, then the initial installments interest rate will be higher and a little part of your installment will go toward the principal amount of your loan. How Personal Loans Affect Your Credit Score?

At the end of your loan tenure, your bank or lender will decrease your interest rate and the more money will pay will add toward your principal amount.

How to calculate interest on a loan of an amortized loans?

To calculate your amortized loans you need to follow the below steps:

  1. Divide your interest rate by the no of installments which you will pay this year. In short “(Interest rate÷100)÷No of installment current year).

e.g. Assume that your interest rate is 3% and you will pay a total of 12 installments this year then the calculation will be (3÷100)÷12=0.0025

2. And multiply the above result with the remaining loan balance.

e.g. Also assume that you $10,000 remaining loan balance then 0.0025×10000=25.

$25 will be your interest amount.

Home loan, personal loan, auto loan etc kinds of loans are amortized loan.

Amortized loan example:-

Principal Loan Amount: $200,000

Interest Rate: 8%

Loan Tenure: 3 years

Payment schedule & interest rate amortizes will be:

Number of Payments: 36

Monthly fixed Principal & Interest: $6,267

Total Payments: $225,622

Month/YearPayment AmountInterest PaidPrincipal PaidMortgage Balance
1 – August 2021$6,267$1,333$4,934$195,066
2 – September 2021$6,267$1,300$4,967$190,099
3 – October 2021$6,267$1,267$5,000$185,099
4 – November 2021$6,267$1,234$5,033$180,066
5 – December 2021$6,267$1,200$5,067$174,999
6 – January 2022$6,267$1,167$5,101$169,899
7 – February 2022$6,267$1,133$5,135$164,764
8 – March 2022$6,267$1,098$5,169$159,595
9 – April 2022$6,267$1,064$5,203$154,392
10 – May 2022$6,267$1,029$5,238$149,154
11 – June 2022$6,267$994$5,273$143,881
12 – July 2022$6,267$959$5,308$138,573
13 – August 2022$6,267$924$5,343$133,229
14 – September 2022$6,267$888$5,379$127,850
15 – October 2022$6,267$852$5,415$122,435
16 – November 2022$6,267$816$5,451$116,984
17 – December 2022$6,267$780$5,487$111,497
18 – January 2023$6,267$743$5,524$105,973
19 – February 2023$6,267$706$5,561$100,412
20 – March 2023$6,267$669$5,598$94,814
21 – April 2023$6,267$632$5,635$89,179
22 – May 2023$6,267$595$5,673$83,506
23 – June 2023$6,267$557$5,711$77,796
24 – July 2023$6,267$519$5,749$72,047
25 – August 2023$6,267$480$5,787$66,260
26 – September 2023$6,267$442$5,826$60,435
27 – October 2023$6,267$403$5,864$54,570
28 – November 2023$6,267$364$5,903$48,667
29 – December 2023$6,267$324$5,943$42,724
30 – January 2024$6,267$285$5,982$36,742
31 – February 2024$6,267$245$6,022$30,719
32 – March 2024$6,267$205$6,062$24,657
33 – April 2024$6,267$164$6,103$18,554
34 – May 2024$6,267$124$6,144$12,410
35 – June 2024$6,267$83$6,185$6,226
36 – July 2024$6,267$42$6,226$0

The main topic covered “How to calculate interest on a loan

Co Operative bank home loan emi calculator

Co Operative bank home loan emi calculator will help you find the EMI plan of your loan. EMI calculator will calculate your loan on the basis of your tenure, loan interest & principal loan amount.

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