How to Figure Interest on a Loan

When you make a large purchase, such as a home or a car, you likely have to obtain financing from a third party financial institution. These institutions will loan you money to pay for the item, but you must pay back the loan with interest. If you want to figure out your annual or monthly interest payments over the life of the loan, you can do so with some simple math.

Things You'll Need

• Calculator (optional)

Instructions

1. Write down the total amount of your loan and the interest rate for the loan.

2. Multiply the total amount owed on the loan by the interest rate. For example, if you owe $100,000 on the loan at a rate of 5 percent, multiply 100,000 by .05. The total would be $5,000. This is the amount owed in interest for one year.

3. Calculate the total amount of interest on the loan. Multiply the figure in Step 2 by the number of years on the loan. For example, if the loan is for 10 years, multiply 5,000 by 10 for a total of $50,000 in interest owed over the life of the loan.

4. Multiply the number of years of the loan by 12 to determine the number of total payments on the loan. For example, a 10-year loan would require 120 payments.

5. Figure your monthly interest payment. Divide the total amount of interest (from Step 3) by the total number of payments. For example, divide $50,000 by 120 for a monthly payment of $416.67.

References

• EFunda: Loan Calculators
• EFunda: Loan Payment Schedule