If you decide to borrow any amount of money, you should first take into consideration the loan interest rates. Nowadays, seldom do we find money lending business or individual that does not charge additional interests on loans. There are a number of reasons why they charge fees including the incurred risk like inflation or non- payment of the entire loan or even just a part of it. Loan interest comes in two basic forms: simple interest and compound interest.
Simple interest is basically a one-time amount of interest on the total amount being borrowed. Unlike simple interest, compound interest is a complicated form because the interest is repeatedly compounded. In other words, the interest amount to be paid is on the total amount being borrowed followed by a new amount that is charged interest once more. The repetition is done for every increment of time like daily, weekly, monthly or yearly. There are four pieces of information you need to know before you can calculate loan interest. They are interest rate, principal, time duration and the form of interest rate loan (simple or compound).
Basically, the principal is the total amount of money being borrowed that should be repaid plus the interest. The loan interest rate is the principal’s percentage that should be paid for the borrowed principal. The duration of time is basically the length of time within which you are required to repay the total loan or principal (plus interest) typically in years or months.
Before you calculate the interest you are expected to pay on the loan calculator(simple or compound), you should gather all specific loan information. Write them down on a piece of paper and prepare a calculator. For Simple Interest, the formula to be used is I=Prt, where “I” is the interest, “P” is the principal, “r” is the interest rate and “t” is the time duration of the loan. For computation, all you need to do is substitute the known data or loan information into the formula provided above. Total loan repayment can be calculated by simply adding the principal and the interest.
For Compound Interest, the loan calculator formula to be used is P(1+r)^t, where “I” is the interest, “P” the principal, “r” the interest rate and “t” the time of duration. The factor herein is an exponent, represented by the symbol, ^. This formula is used for calculating the total repayment amount. In calculating the total amount of interest, subtract the principal from the total repayment amount.
It is important for you to know how your loan interest rates are being calculated before taking out a loan from a bank. You should also be aware that methods of computing interest rates vary from bank to bank. Thus, amount of interest you need to pay can be changed by eveyr method used. A loan contract with a bank can be better understood if you can calculate interest rate on your own. You will be quoted with the effective rate of interest by banks. Another term for effective rate of interest is Annual Percentage Rate (APR). It is different from the interest rate mentioned above.
Interest rate changes can be caused by a number of factors such as political short- term gain, deferred consumption, inflationary expectations, alternative investments, risks of investment, liquidity preference and taxes. It is well for you to research on these factors to better understand them. It is also important for you to compare interest rates among several banks and find out which one offers the best or most reasonable deal on bank loans. You should therefore consider how monthly payments and total repayment costs rise and fall. All of this information should be kept in mind before starting to search for a loan.