How to Calculate the Formula for Interest Payments
When you have a loan outstanding, it helps to understand how to calculate interest payments. After you make your standard monthly payment, you will be able to determine how much of your payment goes to interest. If your loan is an interest-only loan, the entire payment will be interest and your balance is not reduced. There are a couple of formulas you can use to calculate your interest payments.
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Instructions
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Gather the terms and conditions of your loan. You will need the loan balance and the interest rate. For this example, assume a loan balance of $50,000 with an interest rate of 7 percent to calculate interest payments.
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Take the total amount of the loan ($50,000) and multiply it by the interest rate (.07). The result is $3,500, which is divided by 12 to calculate an interest payment of $291.66. This figure represents 30 days of interest.
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Take the interest rate (.07) and divide it by the number of days in a year. (Most lenders use 360, which assumes each month has 30 days, to simply the process). Your result is .0001944. Multiply that number by 30 days (one billing cycle). The new figure (.005832) is multiplied by the balance ($50,000) to get $291.60.
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Compare the two calculation methods. The interest payment for the first method was $291.66, and the second method was $291.60. If you use an online calculator for mortgages, auto loans, personal loans or credit cards, you will find that the first interest payment ($291.66) is the figure that will be calculated.
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Tips & Warnings
Subtract the interest payment from your standard loan payment to find out how much you will reduce your loan principle each month.
