How Do You Calculate Interest?

In general, there are two formulas that banks use to calculate interest, in regards to investments like real estate. These are known as:

- Simple Interest

- Compound Interest

Simple interest is probably something that you are already familiar with. The basic formula describes that a PRINCIPAL amount of money will accumulate interest at a specific RATE over a specific amount of TIME. Therefore the equation or formula looks like this:

I = (P * r * t) - P

This is formula works for all simple interest equations and can work for most standard investments or loans. One example might be:

\$5,000.00 at 8% for 6 years

I = {(5,000) * (0.08) * (6)} - 5,000

I = \$2400 total over the course of the investment or loan. (Obviously, if you remove the "6” years from the equation you can calculate the amount of interest accrued over the course of a single year, which in this case would be \$400)

Compound interest is a little more complicated. This is the type of formula used to calculate long term investments and it looks like this:

I = {P(1 + r)t} - P

This formula describes that instead of simple interest over a period time, you accrue more interest on top of what you have already earned. So using the same example:

\$5,000.00 at 8% for 6 years

I = {5,000(1 + .0.08)6} - 5,000

I = \$2934.37

As you can see, compound interest will always earn more, especially the longer the investment sits.

There is a second part to this question which pertains to how banks calculate how much interest to charge. There are two parts to this answer:

1. The prime rate: An average rate based on market stability and availability of funds

2. Your credit history and credit score

Banks use the Prime Rate (1) to set up a scale by which they assess your interest rate based on your credit history (2).
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well the formula is

S=P(1+I)^n

where,

S= Future Value
P= Present Value ( Value of Loan )
I = interest rate
n= number of Periods for which loan has been taken

If you want to calculate you must know the present value, future value and the rate of Interest ..

Good Luck

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What is the you paid in a loan 18,600 on 10%of interest for 60 months & how much will be my monthly payment ? And how much I will end up paying in total. Thank  you.
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The formula to calculate simple interest is as follows;

I=Prt
where I is interest
P is amount taken as loan
r is the rate of interest on loan
t is the time period for which loan is taken

Compound interest formula is as follows;

A = P(1 + r)n
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There are two ways to calculate the amount that has been earned as an interest on a certain amount. The first method is the simple interest and other one is compound interest. As the name itself suggests, calculating interest on simple interest is quite easy and the formula that you can use to calculate this kind of interest is following: r x p x t / 100. In the formula r, p and t stand for rate of interest, principal amount and time respectively.

When you are calculating compound interest you will have to apply a different formula altogether to calculate it. First of all you will have to calculate the amount that comes as a result of the accumulation of principal and interest. The accumulation can be calculated with the following formula: P (1+ r/100) ⁿ.
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Interest is of two types. Firstly there is simple interest where a fixed amount is calculated on the principal amount for a given period of time. If it calculated on say an "x" amount for a couple of years then the interest amount remains the same for all those years unless the principal amount is increased.

Compound interest on the other hand involves each subsequent amount of interest earned being added or compounded to the principal amount for subsequent interest calculations.

Simple interest can be calculated a simple formula of Interest being equal to the product of the principal, interest rate and term (time). The formula of compound interest on the other hand is Principal Amount × (1+Rate of Interest) ^Period. Period here refers to Time.
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The simple formula that is used to calculate interest on a principle amount or loan is as follows:

Principal X Rate X Time = Interest Amount

In this case, Principle is the amount of loan which you are taking. Rate is the interest rate that is determined by the market. Time is the duration for which loan is being taken. And by multiplying all these three factors, you will get total interest amount on a specific loan.

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8% interest on \$3,051.26 starting 2/2001 to 8/2007
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The home price is 650,000, down percent is 5 , and the down payment is 32,500.what is the loan amount. Show me the steps to th prob lem
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The monthly interest rate is 8%.
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9. Justin Benedict borrows \$11,000, and agrees to repay it in monthly payments of \$253.11 for 60 months. Find the approximate annual percentage rate for the loan.
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