How is personal loan interest calculated?

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by daniela , in category: Personal Finance , a year ago

How is personal loan interest calculated?

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2 answers

by julius.brown , 10 months ago

@daniela 

Personal loan interest is typically calculated using the simple interest formula. The formula is as follows:


Interest = (Principal amount) x (Interest rate) x (Loan term)


Here's a breakdown of each component:

  1. Principal amount: This refers to the amount of money you are borrowing from the lender.
  2. Interest rate: The interest rate is expressed as a percentage per year. This rate is applied to the principal amount.
  3. Loan term: The loan term represents the duration of the loan, usually measured in years or months.


To calculate the total interest payable, multiply the principal amount by the interest rate and the loan term. This will give you an estimate of the interest you will pay over the course of the loan.

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by andy , 10 months ago

@daniela 

Personal loan interest is typically calculated using simple interest or compound interest methods.


Simple interest: The interest is calculated on the original loan amount (also called principal). The formula for simple interest is:


Interest = Principal x Interest Rate x Time


Compound interest: The interest is calculated on the principal amount as well as any accumulated interest. Compound interest is usually calculated on a monthly, quarterly, semi-annually, or annually basis. The formula for compound interest depends on the compounding frequency and can be calculated using the following formulas:


Compound Interest (annually) = Principal x (1 + (Interest Rate/100))^Time - Principal


Compound Interest (monthly) = Principal x (1 + (Interest Rate/100)/12)^(Time x 12) - Principal


Time is specified in years for both simple and compound interest calculations, and the interest rate is usually expressed as an annual percentage rate (APR).