How to Calculate a Simple Interest Payment
Simple interest is the starting point for calculating the charges for many types of loans. A simple interest payment is the dollar amount of interest on a principal balance. A payment on an installment loan or credit card includes both interest and a sum that goes to pay off the debt. As the debt is reduced, the amount of interest declines and more of the payment goes toward paying off the debt. It's easy to understand how to calculate a simple interest payment by using a straightforward example like a credit card payment. Installment loans (like car loans) work the same way, but they are far more complicated to calculate because the number of payments is fixed.
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Things You'll Need
- Calculator Credit card statement Loan calculator software (for fixed-term simple interest payments)
Instructions
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1
Start to calculate a simple interest payment on a credit card by finding the interest rate on a credit card statement (not the APR or annual percentage rate, as explained in Tips). Divide the interest rate by 12 to find the percentage interest charged each month. Multiply this by the average balance listed on the statement to find the dollar amount of interest. For example, if the interest rate is 15.0 percent, divide this by 12 to get the monthly rate of 1.25 percent. If the balance on the credit card is $1,000, the interest will be 1.25 percent of $1,000 or $12.50.
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Subtract the interest amount from Step 1 from the payment to be made. If the monthly (minimum) payment is $20.00, then this comes out $7.50 ($20.00 minus $12.50). This is the amount that will be applied to the principal (credit card balance) to reduce your total debt. Subtract the $7.50 from $1,000 to get your new balance of $992.50.
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3
Understand how interest charges decline as a debt is paid off. If you don't add new charges to the credit card in our example, the next month's interest will be 1.25 percent of $992.50, or $12.41 (instead of $12.50), which leaves $7.59 to go toward paying off the debt. Each month (if you don't add any new charges) a little more of the payment will go toward paying off the account balance.
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Figure a simple interest payment when another fee is added. We'll use the same figures as in Steps 1 and 2. Assume that there is a fee for insurance against identity theft of $5 per month. After Step 2 you have a balance of $992.50. Now add in the $5 insurance fee. This brings your new balance to $997.50. You've now lowered your balance only $2.50. Because the $5 has been added to your balance, interest will be charged on it on each future payment.
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Use a loan calculator for fixed-term loans to calculate a simple interest payment. A credit card payment is mathematically simple because there is no set number of payments. When you calculate a simple interest payment on a loan which is to be paid off in a predetermined number of payments, figuring out how large the payments have to be is complicated mathematically, although the process follows the same principles illustrated above. There's a link to a loan calculator under Resources to use to calculate this type of simple interest payment.
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Tips & Warnings
Simple interest payments are used in some form for car loans, mortgages and many other installment loans. Keep in mind that these often have added fees. That's why federal law requires that lenders list the "APR" (annual percentage rate) in addition to the interest rate. An APR isn't a true interest rate. It does make allowance for added fees and is intended as a way to alert consumers to the presence and cost of such fees. Always ask a lender for a detailed explanation of all fees and charges before signing off on a loan of any kind.
