How to Calculate Loan Interest

Loan application

Whether you’re purchasing your dream home, a new car, or you’re in need of short-term additional funds, it’s great to have the option of applying for a loan. That said, before you sign off on anything, it’s important to have a plan in place for how you’ll repay the loan, keeping pesky interest rates in mind. If you’re unsure of how to calculate loan interest, Xpress Cash has got you covered! 

How to Calculate Interest on a Loan

To calculate interest on a common loan such as a home, auto, or personal loan, you would follow this formula:

  1. Divide your interest rate by the number of payments you’ll make in one year. (If you’re making monthly payments, you would divide by 12.)
  2. Multiply that number by the total amount of your loan (your principal amount).

For example, consider an interest rate of 4.5 percent (0.045), with principal amounting to $5,000, while making monthly payments over the course of one year (12 months). In this case, your interest for the first month would amount to $18.75, according to the following calculation:

  1. 0.045 / 12 = 0.00375
  2. 0.00375 x 5,000 = 18.75

This basic interest formula is helpful in that it will give you a good overall idea of your total interest to be paid over the course of your loan, but it’s important to remember that as you start paying off your loan each month, the interest you pay will decrease. To get the clearest picture of what the coming months will look like in terms of interest, you’ll find amortization loan interest calculators from trusted sources like Credit Karma are often the most accurate tool to use.

What Affects Your Interest Rate?

There are multiple factors that can impact the interest rate you receive on a loan:

  • Your Risk Factor: If you have poor credit or are otherwise considered to be of high risk as a borrower, your lender will likely charge a higher interest rate to lower their own risk.
  • The Loan Term: Differences between short-term or long-term loans can also play a role in your interest rate. Short-term loans tend to get lower interest rates, while long-term loans tend to get higher interest rates due to future economic conditions being difficult to predict. Again, it’s all about the lender lowering their own risk.
  • Your Collateral: If you’re applying for a secured loan, you’ll need to borrow against your auto loan, home mortgage, etc. In these cases where you’re providing collateral, you’ll often get lower interest rates because the risk for the lender is far lower. However, if you’re unable to make your payments, you stand to have your collateral seized. If that’s a worry, lower interest rates may not be worth the risk.

Explore Your Loan Options at Xpress Cash Today

Searching for viable short-term loan solutions? Xpress Cash can help. Contact us to learn more about our cash advances, title loans, or installment loans today. We have locations in Wisconsin, Idaho, and Michigan, and our friendly staff is ready to work with you to find the best solution to your financial needs.