Saturday, February 14, 2009

How to calculate the interest in your loan

The question that many people have been asking me is how to calculate the interest in the monthly payment, the part that is capital and how much capital is there left to be paid.

So i am going to explain it to you. Remember that each time the interest rate change you will have to repeat the calculation.

Suppose you have a loan of $100000 at 5% and payable in 10 years.

10 years = 120 months = 10 *365 = 3650 days.

Hence interest per day = 5 % / 365 = 0.013699%. It is better to leave a few significant figures.

Hence the interest payable for a day = 10000 * 0.013699/100 = $ 1.3699

Interest for first month = 1.3699* 30 = $ 41.097

Suppose that you are paying a monthly payment of $200

As a result you capital payment for the first month is $200 - $41.097 = $158.907

If you are using the diminishing balance method, it means that you now owe $100000-$158.907 = $99841.097

Hence, the next month your interest will be calculated on the lower balance i.e $99841.097

However if the interest rate increase the interest part would increase. If you want to pay the same amount monthly, you can pay less capital and pay the loan in more time. Or vice versa if interest rate decreases.

I hope that these tips would help you. However every lender can supply to you an amortisation schedule with the breakdown of your loan. Read about it here.

Are you having any difficulties to determine the interest part of your loan? Leave a comment below.

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