Loan Interest Calculator

The loan interest calculator (or interest calculator on loan) is a simple tool that helps you estimate the interest on your loan. In addition, you can check the loan's balance including periodic interest and principal payments in the loan amortization schedule, and learn good practices when it comes to taking out loans, like how to compare mortgage rates before closing the deal.

In the following article, we show you how to calculate interest on a loan, and you can read some interesting details in our FAQ.

To learn more about loan amortization, check our amortization calculator.

The best way to understand how interest is calculated on a loan is to introduce it with a real-life example.

Let's assume you are considering obtaining a loan for a car purchase, so you decide to turn to a bank that offers you a personal loan of 10,000 dollars with 6% interest, repaid monthly in 10 years with the same compounding frequency. You can easily insert this data into our loan interest calculator:

• Loan balance: $10,000
• Loan term: 10
• Interest rate: 6%
• Payment frequency: Monthly
• Compounding frequency: Monthly

1. As a first step, you need to compute the equivalent rate, which is adjusted for compounding frequency. Since, in the present case, the payment frequency and the compounding frequency coincide, the equivalent rate equals the given interest rate. If you want to check the formula for this calculation, visit our equivalent rate calculator.

2. Calculate the periodic rate ($i$) by dividing the annual interest rate by the number of payments in a year. In our case, it is 0.06 / 12 = 0.005.

3. Compute the total number of payments (or periods, $n$) required to repay the loan principal. In our case, it is 12 × 10 = 120.

4. Apply the below formula for calculating the periodic payment.

where:

• $P$ — Periodic payment;
• $A$ — Loan balance or principal;
• $i$ — Periodic rate; and
• $n$ — Number of payments or periods.

In our case, the periodic (monthly) payment is $111.02.

5. Calculate the total payment by multiplying the periodic payment by the number of payments. Therefore, the total payment is 111.02 × 120 = $13,322.46.

6. The interest payment is the difference between the total payment and the principal balance (or loan amount). That is, the interest on the above loan is 13,322.46 – 10,000 = $3,322.46.

The loan interest formula can be formulated in the following way.

Interest = A - (i × A × n)/(1 – (1 + i)^-n)

where:

• A is the loan balance or principal;
• i is the periodic equivalent rate; and
• n is the number of payments or periods.

You need to follow the below simple steps to apply for our loan interest calculator:

1. Input the loan balance you plan to borrow. It will be the principal, which needs to be repaid.
2. Provide the loan term.
3. Provide the interest rate.
4. Set the payment frequency.
5. Choose the compounding frequency, which will be the timing of capitalization of the interest (the unpaid amount of interest added to the loan's principal balance).

You can also follow the accumulation of the total interest on the chart of balances displayed below the main results.

Before taking out a loan, it's important to set a budget. This means examining your income and monthly expenses to see how much you can realistically afford to borrow and repay without harming your finances. Setting a clear limit will help you stay on track and avoid debt problems later.

Another important step is understanding collateral. Some loans are secured. This means that you offer something valuable, like a car or a home, to guarantee the loan. If you don't pay, the lender can take the collateral.

Secured loans usually have lower interest rates but are more risky if you can't make payments. Unsecured loans, like personal loans and credit cards, don't require collateral but often have higher interest rates.

You should also learn about the different types of loans available. Common loan types include mortgages, personal loans, auto loans, and student loans. Each loan has different features and repayment terms. These terms include the time allowed for repayment and the monthly payments.

Remember that it's always beneficial to compare loan offers from different lenders and not focus on the first offer you receive. For example, compare mortgage rates from different vendors before buying your dream home.

When borrowing money, it’s important to know what you’re really paying. The interest rate is the basic cost of borrowing money, which we already know. But there’s also the APR (Annual Percentage Rate), which includes not just the interest but also extra fees like origination charges. APR gives you a more complex look at the total cost of the loan. Another thing to pay attention to is how often interest is added, called compounding frequency. The more frequent the compounding, the more you’ll pay overall. Understanding how your loan compounds will help you better estimate the actual cost.

Also, be aware of the type of interest your loan has:

• Fixed-rate loans: The interest stays the same for the entire loan term, and your monthly payments remain the same.
• Variable-rate loans — The interest can change over time based on market rates. This means that your monthly payments can change during the loan period.
• Simple interest loans — You only pay interest on the original loan amount.
• Compound interest loans — You pay interest on the loan plus any unpaid interest already added.