How to Calculate Interest on a Loan, calculate home loan.#Calculate #home #loan

Calculate Loan Interest

Calculate home loan

The easiest way to calculate loan interest is with a calculator or spreadsheet, but you can also do it by hand if you prefer. We’ll cover each of those approaches on this page.

Technology makes quick work of the calculations, but when you do the math yourself (at least some of it) you notice details that can help you make better financial decisions.

Types of interest: it’s important to understand exactly how interest is charged, and that depends on the loan and your lender.

For example, credit cards often charge interest daily – so it pays to make your payment as soon as possible. Other lenders might calculate interest monthly or even annually. This detail is important because you need to use the right numbers for your calculations. Interest rates are usually quoted as an annual percentage rate (APR). If you pay interest monthly, you’ll need to convert that rate to a monthly rate by dividing by 12 for your calculations (for example, a 12% annual rate becomes a 1% monthly rate).

Calculators and Spreadsheets

If you want to do as little math as possible, there are two ways to take advantage of technology:

  • Spreadsheets like Microsoft Excel, Google Sheets, and others make it easy to build a model of your loan. See exactly how to calculate with a spreadsheet (with easy-to-follow steps). With the model built, you can easily see how different loans compare, and you can see things you’re your lifetime interest costs.
  • A loan amortization calculator does everything for you: it will calculate your monthly payment, show how much interest is in each payment, and show how much you pay down your balance every month. Copy and paste the output into a spreadsheet if you want to do more analysis.

How to Calculate Loan Interest Yourself

Don’t want to use a spreadsheet or calculator?

You can do it all by hand – or at least build a spreadsheet by hand – and you’ll become a pro at understanding interest expenses.

For standard home, auto, and student loans, the best way to do this is to build an amortization table. This table shows every payment, interest and principal amounts, and your remaining loan balance at any given time (just like a spreadsheet or a good calculator does). To calculate, you ll need to know a few important variables:

  • The interest rate
  • The length of time you ll borrow
  • The amount that you re paying interest on (known as the principal)
  • The monthly payment (see how to calculate payments below)

For a quick estimate of interest costs, a simple interest calculation can get you “close enough.”

Simple interest example: assume you borrow $100 at 6% for one year. How much interest will you pay?

Most loans aren t that simple. You repay over many years, and interest is charged every year, sometimes even compounding and causing your balance to grow.

Real-life example: assume you borrow $100,000 at 6% APR to be repaid monthly over 30 years. How much interest will you pay?

Assume this is a standard loan like a home loan.

Hint: the monthly payment is 599.55.

You’ll actually pay a different amount of interest every month – ideally less each month. These loans go through a process called amortization, which pays down your loan balance over time.

The table at the bottom of this page shows how your loan calculations might look; total interest over the first three payments is $1,498.50 ($500 $499.50 $499). To build that table yourself, use the steps below:

  1. Calculate the monthly loan payment (see how to calculate payments)
  2. Convert the annual rate to a monthly rate by dividing by 12 (6% annually divided by 12 months means a 0.5% monthly rate)
  3. Figure the monthly interest by multiplying the monthly rate by the loan balance at the start of the month (0.5% times $100,000 equals $500 for the first month)

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  1. Subtract the interest costs from the monthly payment (and keep a running tally in an additional column if you like)
  2. Apply the remainder of the monthly payment to principal repayment (reduce your loan balance by the principal payment)
  3. Calculate your remaining loan balance
  4. Copy the remaining loan balance to the next line
  5. Repeat steps 2 through 8 until the loan is paid off

You’ll see that a portion of each payment goes towards your interest expense, while the rest pays down your loan balance. Payments in the early years mostly go towards your interest costs (this is especially true for long-term loans). Over time, the interest portion decreases, and you pay down the loan more quickly.

Helpful tips for calculation:

Calculate Credit Card Interest

With credit cards, the calculation is similar, but it can be more complicated. Your card issuer may use one of several different methods to calculate your interest charges and minimum payment. These calculations account for purchases and payments that occur throughout the month, and the card issuer’s approach to generating profits.

To see an example of how to calculate interest, payments, and debt payoff with a credit card yourself, see Calculate Credit Card Payments Costs.

Calculate Loan Interest Rates

If you want to calculate a loan’s interest rate – as opposed to interest costs – see How to Calculate Interest Rates.

Interest Expenses

Interest effectively raises the price of the things you buy, whether it s a new home, a car, or equipment for your business. In some cases, those interest costs are tax deductible – which is one more reason not to ignore them. In other cases, interest is simply the price you pay for using somebody else s money.

To understand your finances, it’s wise to calculate interest costs any time you borrow. This helps you compare the costs of different loans, and it’ll even help you evaluate big decisions (such as how much to spend on a house or automobile). You can compare lenders, choose between ​longer or shorter loan terms, and find out how much ​the interest rate really affects your total interest costs.

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