How to Find an Interest Rate Formula
Applying for a loan can be an overwhelming experience because so many numbers are involved. The process is less daunting when you understand the math involved. Most consumers are primarily concerned about the rate they will receive for the loan. The higher the rate, the more interest you will pay on the principal amount of the loan, which is what the consumer borrows from the lender.
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Instructions
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For our first example, we use a loan amount of $50,000, which is the principal amount of the loan. The interest will be $5,000, and the loan will be paid over 15 months. In the second example, the loan amount will be $100,000. The interest paid over the course of the loan is $25,000 and will be paid over 24 months.
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Insert numbers into the formula r = I / P t.
I is for interest that will be paid over the life of the loan, P is the principal balance of the loan and t is the amount of time in months that it will take to pay the loan back. You will solve for r, which will be the interest rate.
Example 1:
I = 5,000
P = 50,000
t = 15
Example 2:
I = 25,000
P = 100,000
t = 24
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3
Multiply the interest by 12, the number of months in a year. Write this number down.
Example 1:
5,000 x 12 = 60,000
Example 2:
25,000 x 12 = 300,000
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4
Multiply the principal by the number of monthly payments.
Example 1:
50,000 x 15 = 750,000
Example 2:
100,000 x 24 = 2,400,000
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Take the number you got from multiplying the interest and 12 and divide it by the number you got from multiplying the principal and the number of monthly payments.
Example 1:
60,000 / 750,000 = .08
Example 2:
300,000 / 2,400,000 = .125
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Move the decimal point to the right two spaces. This is your interest rate on your loan.
Example 1:
.08 = 8 percent
Example 2:
.125 = 12.5 percent
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References
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