How to Find Interest on a Loan

Man using calculator

If you’re planning to apply for a loan, you will need to be sure that you’re financially prepared to pay back not just the total amount borrowed, but also your accrued interest. As such, when it comes time to choose a lender and sign the dotted line, you will want to go with an option that offers a good interest rate. Your lender should be able to tell you the exact interest rate you’ll be offered, but there may still be times when you’ll want to know how to find the interest rate on a loan by yourself. This can be done with a simple equation, which we’ll cover in detail down below. 

How to Find Interest Rate on a Loan: Step-by-Step Instructions

Again, your lender should be able to provide the interest rate information for you, but if ever you find yourself in a position to need to know how to calculate the interest rate on your own, you can follow these simple steps:

  1. Divide your principal (total loan amount) by your loan term (in months)
  2. Subtract that number from the monthly payment amount agreed upon with your lender
  3. Divide that number by the monthly payment amount before interest (hint: this is determined by dividing your principal by the loan term, so it will be the same number you got from step one)
  4. The final answer you get will be expressed as a decimal, which you can multiply by 100 to see your interest rate as a percentage

Here’s a working example:

Let’s say you’re borrowing $100 over a 10-month period, and you’ve agreed to make monthly payments of $11. Here’s how the formula we showed above works out using these numbers:

  1. 100 (principal) / 10 (loan term) = 10
  2. 11 (monthly payment amount) – 10 = 1
  3. 1 / 10 (monthly payment before interest) = .1
  4. .1 x 100 = 10%

Using this example, your interest rate would be 10%.

What Are the Factors That Affect Your Interest Rate?

As you shop around for the right loan for you and compare interest rates, you may be curious to know what factors can affect the rates you’re offered. Here are the top things lenders will consider:

  • The Risk of Borrowing to You: If you have a bad credit score and an iffy credit history or have had trouble making loan payments in the past, lenders might consider you to be a high risk borrower and will charge a higher interest rate to lower their own risk.
  • The Loan Term: Whether you choose a short term or long term loan can play a significant role in your interest rate as well. Short term loans may come with higher interest rates to compensate for the shorter repayment period.
  • Collateral: If you’re applying for a secured loan, you’ll need to borrow against your auto loan, home mortgage, etc. as collateral. When you’re providing collateral, you might get a lower interest rate because the risk for the lender is lower. Here, it’s important to remember that if you’re unable to make your payments your collateral may be seized, so the lower interest rate might not be worth the risk.

Need Additional Help? Contact Xpress Cash!

If you have any lingering questions about interest rates and how they’re calculated, the team at Xpress Cash is here to assist. Contact us or stop by to see us at one of our Michigan locations to get started, where we can tell you more about the short-term loan options we have available.