Interest on a loan: How to calculate it according to the type of loan?

Interest on a loan: How to calculate it according to the type of loan?

Interest on a loan is a fee that lenders charge borrowers for using their money. It is an important part of the loan process and is worth understanding. The calculation of interest on the loan is done differently for each type of loan. Knowing how to do this can help you make better financial decisions . Read on to find out how to calculate interest on different types of loans.

How is interest on a loan calculated?

Interest is a fee that lenders charge borrowers in exchange for using their money. The interest rate is often called the Annual Percentage Rate (APR), or simply ‘interest’ or ‘rate’. This interest can be calculated on a daily, monthly, semi-annual or annual basis , depending on the terms of the loan and how often the lender receives payments.

For example: If you ask for a loan of 1,000 euros and make monthly payments of 100 euros per month for 12 months (1,200 euros in total), the annual interest rate would be 12%. In other cases, and depending on the time of the loan, the total amount and the payments, the parties may mutually agree on a monthly interest .

How to calculate the interest on a mortgage loan?

To calculate the interest on the mortgage loan, you must first know the type of loan, whether it is a fixed or variable rate .

You should also know the APR or equivalent annual rate , which is nothing more than the interest rate that is applied to the loan .

Then, to calculate the interest on the mortgage, you must multiply the amortization payment by the annual rate . However, you should know that the calculations change as payments are made and/or interest rates change. This will tell you what amount is paid each month for capital and what amount corresponds to interest for each euro lent by the lender.

Let’s try to calculate an example of mortgage interest . Suppose that the amount of capital to be repaid is 150,000 euros. And the annual interest rate is 6%. We must pay the loan installments monthly, our month for which we calculate the interest is 31 days and the year is 365.

Interest = €150,000 * 0.06 * 31/365 = €764.

In such a way that, after calculating the interest on the loan, we can see that this month the interest will be 764 euros.

How to calculate interest on a revolving loan?

In principle we must clarify for those who are not clear, that it is a revolving credit . This type of credit, also called revolving credit , is characterized by not having a fixed or determined number of installments as is the case with conventional credit.

In this type of loan, interest is calculated daily . Then, the bank adds all the interest accumulated in a month or quarter based on what was pending payment at the end of the previous period. That is, interest is calculated on the outstanding balance on the date of the last payment.

For example, if you have a balance of 10,000 euros on your credit card and it has an interest rate of 18%, after a year you will pay 1,800 euros in interest.

How to calculate interest on bank loans?

When calculating the interest on a bank loan, the following must be taken into account :

  • Type of loan.
  • Annual interest rate, that is, the interest rate included with the bank’s margin.
  • Amount of the borrowed amount.
  • Period of validity of the loan.

To calculate the interest on the loan, the nominal interest rate must be multiplied by the amount borrowed . Then, divide the result obtained by 12 , which will give you an approximate value of the monthly interest . However, remember that the final amount may differ slightly

After the calculation, you will not only be able to see the value of the total debt , but also how the decreasing installment or the relationship between the principal installment and the interest installment changes , when choosing an equal installment.

Difference between the TIN and the APR

Let’s start by defining the concept or meaning of each one:

The TIN ( Nominal Interest Rate ) can be understood as the cost of the money that the bank has lent us . In other words, the money we pay the bank as compensation for the capital it lent us . It represents a specific percentage, on the amount received as a loan, and its calculation is made on a monthly basis . In addition, it must be clearly indicated in any loan contract or offer of any type of banking product.

On the other hand, the APR ( Equivalent Annual Rate ), unlike the TIN, is made up of different variables, which include the TIN itself. Also, it can include other possible commissions and bank charges . Something to remember is that the APR does not include external expenses such as the acquisition of insurance, notary fees, etc. Finally, to obtain the APR, an already established mathematical formula must be used .

In such a way that, while the TIN is only what is paid for the borrowed money without including any additional charges , the APR is the total amount that is paid, including all additional expenses and commissions.

Samuel Edwards
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