How to calculate interest on a personal loan

Written by melvin richardson
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How to calculate interest on a personal loan
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A personal loan is one extended to a borrower without the need for security or collateral such as an automobile or a home. These types of loans are also called signature loans. A borrower needs only to sign the loan documents to receive the loan once approved. You can calculate the interest on a personal loan if you have all the terms and details. A high interest rate means more interest will accrue over the life of the loan.

Skill level:
Easy

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Things you need

  • Personal Loan Calculator
  • Interest Formula

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Instructions

  1. 1

    Write down all of the terms and conditions of your personal loan. You will need the balance, interest rate and monthly payment. If you have a personal loan in the amount of £975 with an interest rate of 8 per cent, monthly payments of £44.1, for a term of 24 months, the interest can be calculated using a certain formula.

  2. 2

    Take the interest rate of 8 per cent and divide it by 360, (the number of days in a year for simplicity purposes). The result (.0002222) should be multiplied by the number of days in the billing cycle, which is 30. Your new results (.006666) should be multiplied by the balance of £975. This provides you with the interest for the first month which is £6.40, (rounded £6.50).

  3. 3

    Calculate the new balance. Subtract the interest from the monthly payment of £44.1, ($67.84 - £6.50), to get the amount that the balance will be reduced by. The new balance will be £937.4 ($1,500 - £37.6).

  4. 4

    Get next month's balance. Repeat the first half of Step 2: Take the interest of 8 per cent and divide it by 360 to get .0002222; multiply .0002222 by 30 days which gives you .006666. Your new result is now multiplied by the new balance of £937.4. The new interest figure is £6.2. Complete this process for 24 months to get the total amount of interest paid.

  5. 5

    Multiply your monthly payment times the term to calculate the total amount of the loan. Once you have the total amount of the loan you can calculate the total interest that will be paid. Take £44.1 and multiply it times 24 months. The total amount of the loan is £1,058.30.

  6. 6

    Subtract the principal loan amount from the total amount to get the total interest paid, ($1,628.16 - £975 = £83.3). The total interest that will be paid on this personal loan for 24 months is £83.3.

Tips and warnings

  • Get an online loan calculator (see Yahoo Finance reference). Enter the amount of the loan, interest rate and the term in months and hit the submit button. The monthly payment will be calculated as well as a breakdown of the interest paid for each month. Because of rounding the total amount of interest paid can vary.
  • The above calculations assume payments are made each 30 days. If you want to pay at different times of the month you can calculate monthly interest using the number of days between payments instead of 30 days. This will change the total amount of interest you pay on the loan.

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