How to Calculate Loan Interest

Understanding loan interest helps you make better financial decisions.

Types of Interest

Simple Interest

Interest calculated only on the principal amount.

Formula: I = P × r × t

• I = Interest
• P = Principal
• r = Annual rate
• t = Time in years

Compound Interest

Interest calculated on principal plus accumulated interest.

Formula: A = P(1 + r/n)^(nt)

Loan Repayment Methods

Equal Principal Payment

• Principal payment is constant
• Interest decreases over time
• Total payment decreases each month

Equal Total Payment (Amortization)

• Monthly payment stays the same
• Early payments are mostly interest
• Later payments are mostly principal

Example Calculation

Loan: $100,000

Interest: 5% annual

Term: 30 years

Monthly Payment (Amortization)

M = P × [r(1+r)^n] / [(1+r)^n - 1]

• M = $536.82/month
• Total paid: $193,256
• Total interest: $93,256

APR vs Interest Rate

• Interest Rate: Base cost of borrowing
• APR: Includes fees and other costs
• APR gives a more accurate total cost

Tips for Borrowers

1. Compare APRs, not just interest rates

2. Consider shorter terms for less total interest

3. Check for prepayment penalties

4. Understand fixed vs variable rates

5. Factor in all fees and closing costs

Use our Loan Calculator to plan your borrowing.