How Do You Calculate Interest?


15 Answers

Monica Stott Profile
Monica Stott answered
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).
Ghazanfar Ali Profile
Ghazanfar Ali answered
well the formula is
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
Anonymous Profile
Anonymous answered
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.
Suhail Ajmal Profile
Suhail Ajmal answered
The formula to calculate simple interest is as follows;

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
Vikash Swaroop Profile
Vikash Swaroop answered
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.
Aun Jafery Profile
Aun Jafery answered
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.
amber Jhon Profile
amber Jhon answered
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.

Anonymous Profile
Anonymous answered
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
Kathleen Griffin Profile

It depends on what exactly credit product do you have. There are many different free online calculators, also you can use service from your bank or lending company. Talking about me I usually use services from online loan company. They provide good interest rate and long credit term.

Anonymous Profile
Anonymous answered
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.
Anonymous Profile
Anonymous answered
How do you find interest if you go 10% p.a. Simple interest if you want $500 interest after 5 years
Stuti Ahuja Profile
Stuti Ahuja answered
Interest is the "rent" paid to borrow money.  Every loan has an annual percentage rate which provides a common basis to compare the interest charges. There are three common methods to calculate interest charges, add-on method, discount method and the remaining balance method.    Under the add-on method, the total interest charge is calculated by the lender by multiplying the entire loan amount by the contractual interest rate and then multiplying the total interest cost by the period of time i.e. Months or years that have been covered by the loan.    The discount method calculates the interest the same way, only that the interest is subtracted from the loan amount and the borrower receives the balance. Under the remaining balance method, the interest charge is calculated in each period by multiplying the contractual interest rate by the unpaid balance. The major difference between this method and the earlier method is that interest is not charged on principal that has been paid.
Anonymous Profile
Anonymous answered
So, for example, I have a loan for $30,000 at 9%APR. If I am calculating this correctly under the

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