In most cases, other than a mortgage loan, the interest due on an unpaid balance of a loan is a moving and changing figure. The process to calculate interest due is relatively simple. In addition, this formula works regardless of the regular scheduled payment period and even if you are late with a scheduled payment.
Establish the correct unpaid balance of the loan. Assume nothing. Compare your lender's figure with your own calculation. If any discrepancy exists, speak with your lender to agree on an amount.
Divide your interest rate by 360 or 365 days. The resulting percentage is your "per diem" interest factor. You really won't have two choices for this factor. Lenders typically use 360 or 365 to calculate interest. If you are unsure of the language in your loan note, ask your lender how they compute interest due.
Determine the exact date your last payment was posted. Do not use the date you mailed, delivered, authorized or electronically made your last payment. Your lender will calculate interest from the date they posted your last payment.
Multiply the outstanding balance by the per diem percentage. The resulting number is your per diem interest charge, the amount of interest you owe each day.
Add up the number of days from your last payment to the current day or the date you will make your next payment. Multiply the per diem interest charge by the number of days. The resulting number is the interest due on your unpaid loan balance. Unless your loan has a specific prepayment penalty, payments above this amount will post to reduce your outstanding balance. For example, assume your regular payment is $250 per month and the next payment should include $200 of interest and $50 of principal reduction. If you choose to pay $275 this month, $200.00 will go to interest, but your principal will reduce by $75.
Use this calculation to calculate interest due at any time during the life of your loan. The frequency of your loan payments are immaterial. This calculation will work even if you make only one or two loan payments per year.
Tips
Calculate interest due for every loan payment until loan maturity if you wish to project interest expense. Verify your calculations after your next loan payment to solve any problems that may exist.
Warnings
Don't panic if your interest-due calculation is a small amount (pennies) different from your lender's charge. The number of "places" to the right of a decimal point used for per diem interest percentage may be different between you and your lender.
References
- How to Calculate Interest Due
- Consumer Financial Protection Bureau. "What Are Prepaid Interest Charges?" Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "Understand Loan Options." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "What Is a Mortgage 'Closing'? What Happens at the Closing?" Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "On a Mortgage, What's the Difference Between My Principal and Interest Payment and My Total Monthly Payment?" Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "Loan Estimate Explainer." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "Explore Interest Rates." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "How Does Paying Down a Mortgage Work?" Accessed March 15, 2020.
Tips
- Calculate interest due for every loan payment until loan maturity if you wish to project interest expense. Verify your calculations after your next loan payment to solve any problems that may exist.
Warnings
- Don't panic if your interest-due calculation is a small amount (pennies) different from your lender's charge. The number of "places" to the right of a decimal point used for per diem interest percentage may be different between you and your lender.