How to calculate interest on the loan?
You can find real, credible “free loan” offers. Often they are only directed to new customers and in their case we give back as much as we borrowed. There is no interest, commissions or additional fees. However, if we are interested not in a loan company but in a bank loan, we must be prepared for the fact that the total cost of the loan will be higher than the capital obtained. Just how to calculate interest on a loan to know how expensive a given loan will be for us?
What determines the amount of interest?
Before we get into how to calculate interest on a loan, it is worth considering what the amount of interest depends on. When we think about interest and the cost of credit in general, we usually focus on interest. In fact, it can be the lion’s share of the fees associated with a given commitment. However, one should not forget about other costs, which may prove decisive when determining the level of profitability of a given loan.
The amount of interest will depend on such factors as:
- repayment period
- interest rate
- amount of credit
- method of calculating interest
- calendar for calculating interest.
In addition, the following is also taken into account when calculating the total cost of credit:
- amount of commission
- additional fees (for example, insurance).
The longer the loan repayment period, the greater the interest and its total cost. This is due to the fact that with long-term loans the amount of outstanding capital decreases more slowly, so the amount of interest accrues on higher amounts.
Obviously, the higher the loan amount, the higher the interest will be. On the other hand, the matter of interest calculation is less obvious, and more specifically: whether the interest rate is variable or fixed.
In the case of a variable interest rate, the interest rate consists of two components: the variable interest rate and the bank’s margin (which is the bank’s main source of income from granting a loan). During the repayment of the liability, the bank will periodically send new repayment schedules, along with the change in the interest rate. The variable interest rate is mainly used for mortgage loans, ie long-term liabilities. In this way, banks protect themselves against potential losses related to changes in average interest rates over the years.
Fixed interest rates remain, as the name implies, the same amount throughout the loan repayment period. Fixed interest rate is most often found with short-term consumer loans, because it is unlikely that there will be big fluctuations in interest rates during this time, so it is not a big risk for the bank.
Calculation of interest
Not everyone is aware of the importance of calculating their calendar when paying interest. The amount of interest in a given month, and consequently also the amount of the installment, depends on how many days there were.
More days means higher interest, so in the case of long (31-day) months we will pay more than in the case of short (eg 28-day) months. In addition, it is worth knowing that when making its calculations, the bank takes the length of the year as 365 days.
How to calculate interest on the loan?
You can calculate interest on the loan in two ways – manually or using online calculators. Almost nobody uses this first solution because it requires the use of complex mathematical formulas. The second option is much faster and easier to perform.
All you have to do is enter all the necessary information (loan length, capital, interest rate, etc.) into one of these calculators and you will be able to enjoy the result immediately.
It is worth remembering, however, that for various reasons the amount we will see in such a calculator may be slightly different from the one that the bank will actually calculate. Therefore, it may be a good idea to use the calculator that is available on the bank’s website we chose – in this way we should get the most precise result.
Alternatively, instead of calculating the interest or cost of the loan, we can simply pay attention to the APRC (Real Annual Interest Rate), which banks and loan companies are required to provide in all their offers. Importantly, the APRC takes into account not only interest, but also the other costs mentioned above, such as commission or additional fees. It is a percentage of the total loan amount given on an annual basis. The higher the APRC, the less profitable the loan is.