Hey buddies, lenders will borrow your money and you are expected to add some figure on the money given, this is known as interest, as you are paying your loan you are given more than what you have collected. Here you will know how to calculate loan interest with ease.
This is one of the ways banks used to cover up for their services and the risk they took while lending you the money, so the banks make money from you as they borrowed money to you.
Many find it difficult to know how interest can be calculated and it is very important to know before applying for any loan. This will help you know if you can pay back in due time, right here let explain how interest works and how you can calculate the cost of borrowing money.
What is loan interest?
Interest in a simple term is the mark-up amount upon the money borrowed or to be borrow, which is expected to pay together with the given money.
For any given loan, there is an add up the figure and that is the loan interest, let say you take out a personal loan of
N 20,000, The lender may add up an extra N 3,000 (interest), which means you are expected to pay a total of N 23,000 for five years.
Once you start repaying the loan, the money would be split into two, one goes into repaying the principal of the money borrowed, and the other option goes toward the interest costs. Most time, the loan interest charged is determined by your credit history, income, loan amount, loan terms, and the current amount of debt.
How to calculate loan interest
Lenders take different forms when it comes to charging interest, this is done to maximize profits, you aim to just know how it can be calculated, though sometimes loan interest calculation may seem confusing you can crack the wall and get it right.
1. Simple interest method
If a lender uses this method, you can easily calculate the interest loan of what you are going for or that you have gone for.
To do this, you need accurate information on the principal loan amount, the interest rate, and the total number of months or years to pay the loan back.
Now let do the math, the calculation can be done using this formula: Principal loan amount x Interest rate x duration = Interest
For example, when you take a loan of five-year worth
N 20,00, with a 5 percent interest rate.
Now the expected interest for the loan using the simple interest formula is
N 5,000 and here is the math N 20,000 x .05 x 5 = N 5,000. If you are to pay the lender back, you are paying N 25,000 that is how you can do it for other higher figures.
2. Amortizing loans
This method is mostly used by most lenders to charged interest rates for student loans, mortgages,s, and auto loans.
It has a fixed monthly payment and it is paid over time in equal installments, amortizing loans allows the lender to firstly deduct all the interest payment, and the payment made later is schedule for the principal money.
See how you calculate the interest on an amortized loan:
Interest rate divided by the number of payments to make for the year, let say If 6 percent is the interest rate and you are making monthly payments, you would divide 0.06 by 12 to get 0.005.
The number should be multiplied by the remaining loan balance to figure out how much to pay in the interest the first month, Let say, you have an
N5, 000 loan balance, the interest for the first month would be N25.
The lender will have you subtract the interest from your fixed monthly payment to know how much in principal you will pay in the first month.
Factors that can affect how much interest you pay
- Loan amount
- Interest rate
- Repayment schedule
- Repayment amount
How to get the best loan interest rates
There are various ways to improve your chances of obtaining the most favorable interest rate on a loan. They include:
- Improving your credit score
- Pay down your debt to income ratio
Trying to know the true cost of interest on a loan may look difficult but is achievable when you know the type of interest you’re paying, if hate doing math, there are several financial calculators online users can use to get the figure if you are not told by the lender or if you are in a doubt the interest rate amount given.