The easiest way to calculate interest on loans is with a calculator or a spreadsheet, but you can also do it by hand if you prefer. On this page we show you two ways to get the answer:
- For quick answers, use of technology. The online calculators and spreadsheet tips below to work the calculations quickly.
- To understand the details, do at least part of the math yourself. You will make better informed decisions if you understand the numbers.
Types of interest: To get the right information, you need to understand how interest is calculated, and that depends on the loan in question and the rules of the lender.
For example, credit cards often charge interest daily so it pays to make the payment as soon as possible. Other lenders may be interested in calculating monthly or annually. This detail is important because you need to use the correct numbers for your calculations. Lenders usually quote interest as an annual percentage rate (APR). But if you pay interest monthly, you need to convert that rate into 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 the technology:
- Spreadsheets such as Microsoft Excel, Google Spreadsheets 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 and free templates). With a basic model, you can change inputs to see how different loans compare, and you can display the total lifelong interest costs.
- A loan write-off 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 from 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
Do you not want to use a spreadsheet or calculator? You can do it all by hand or at least build a spreadsheet by hand. You have to become a pro at understanding the interest charges.
For standard home, car, and student loans, the best way to do this is to build a repayment table. This table lists every payment, monthly interest and principal, and your remaining balance loan at a given time (just like a spreadsheet or a good calculator does). To complete a calculation, you will need several pieces of information:
- The interest rate
- The duration of the loan lasts
- The loan balance that you pay interest on (known as the principal)
- The monthly payment (see how to calculate payments below)
For a quick estimate of interest charges, a single interest calculation can get you “close enough.”
Simple interest rate example: Suppose you borrow $ 100 at 6 percent for a year. How much interest do you pay?
The simple interest formula is:
- Interest = Principal x rate x time
- Interest = $ 100 x 0.06 x 1
- Interest = $ 6
Most loans are not that simple. You pay for many years, and the interest is charged every year, sometimes even compounding and causing your balance to grow.
Real-life example: Imagine you borrow $ 100,000 at 6 percent April to be repaid monthly over 30 years. How much interest do you pay?
Assume this is a standard installment loan, such as a home loan.
Hint: The monthly payment is 599.55.
You will actually pay a different amount of interest each month – ideally, the amount decreases every month. These loans go through a process called amortization, which decreases your loan balance over time.
The table at the bottom of this page shows how your loan calculations could be viewed. Total interest on the first three payments is $ 1,498.50 ($ 500 + $ 499.50 + $ 499). To build that table yourself, use the following steps:
- Calculate the monthly payment. For tips, see How to calculate Loan Payments.
- Set the annual percentage monthly rate by dividing by 12 (6 percent per year divided by 12 months results in a 0.5 percent monthly rate).
- Figure the monthly interest rate by multiplying the monthly by the loan balance at the beginning of the month (0.5 percent times $ 100,000 equals $ 500 for the first month).
- Subtract the interest charges from the monthly payment. Keep an ongoing overview in an additional column if you want to track interest over time.
- Repay the rest of the monthly payment. This is how you reduce your loan balance: through client payment.
- Calculate your remaining loan balance.
- Copy the remaining loan balance at the beginning of the next line.
- Repeat steps two through eight until the loan is paid off.
You will see that part of each payment goes to the interest charges, while the rest pays below the loan balance. Payments in the early years mainly concern your interest costs, and this is especially true for long-term loans. Over time, the interest rate decreases, and you pay down the loan faster.
Calculate Credit Card Interest
With credit cards, the calculation is similar, but it can be more complicated. Your card issuer can use one of the different methods to calculate interest charges and minimum payments. These methods are good for purchases and payments that occur throughout the month, as well as the card issuer’s approach to generating profit.
For a detailed example of how to calculate interest, payments, and debt payoff with a credit card, see Calculate Credit Card Payments and Expenses.
Calculate loan interest
If you want to calculate a loan interest rate – as opposed to interest charges – see How to calculate interest rates.
Interest effectively increases the price of the things you buy, whether it is a new home, a car, or equipment for your business. In some cases, those interest costs are tax deductible – that’s one more reason not to ignore them. In other cases, the interest is just the price that you pay for using someone else’s money.
To understand your finances, it is wise to calculate the interest charges when you borrow. This allows you to compare the costs of various loans, and it will even help you make major decisions such as how much to spend on a home or car. You can compare lenders, choose between longer or shorter loan terms, and find out how much the interest really affects your total interest charges.