Before discussing and understanding the loan calculation results, we must know the significance of loan calculations. For example, if you need a loan with low credit, then there are several options for bad credit business loans. The calculation process is not always easy and there is no single step formula. It includes interest rates that play a key role in finding the exact payable amount. A number of installments or the time period (in a year) that the loan amount needs to be paid back is also an essential factor. Various parameters are needed to calculate the loan.

Loan Calculation

In most cases, the time period is considered in terms of years. It depends on the lender, bank or investor. Before you decide to apply for a loan, you must be well-aware of the financial institution or bank where you are likely to apply. However, there are several types of loan you can apply for, such as house-building finance, personal loan, car loan, etc. However, that is not the topic of discussion right now. 

The governing parameters that are needed to calculate the exact amount of loan are given below:

  • The length of time the loan lasts
  • Interest rate
  • The principal amount (the loan balance you are paying interest on)
  • Amount of monthly installment.

There are several online commercial loan calculators available on the internet. The two types of interest that are important to understand when understanding your loan calculation results are the simple interest and compound interest.

Simple interest

The general formula for simple loan interest is:

Interest amount = (interest rate in percentage x principal amount x time) / 100

The Calculation for Simple Interest

Let’s assume you borrow $100 for one year at the interest rate of 5%. Putting the assumed value in the formula. You get:

Interest amount = (interest rate in percentage x principal amount x time) / 100

Interest amount = (5 x 100 x 1) /100 

Interest amount = $5

Understanding the Results of Simple Interest

This result shows that if you borrow $100 for one year at a rate of 5%, you have to pay $5 extra that makes $105 total payable amount. In case the lender and you make an agreement that you have to pay a total payable amount as a monthly installment, divide $105 by 12, which gives you $8.75; this implies that you have to pay $8.75 each month to the lender for a year.

All the parameters are kept constant except the duration of time, i.e. assumed to be 5 years. By putting the values in the formula, the calculated interest amount will be $25. You will need to pay $2.09 each month to the lender for the next 5 years.

Compound interest

The formula to calculate compound interest is:

A = P ( 1 + [ r / n ] ) ^ nt

Here

A: The amount you would end up with

r: Annual interest rate

P: Principal amount

t: Time (in years)

n: Number of compounding periods per year (e. g. 12 for monthly and 52 for weekly)  

The Calculation for Compound Interest

Suppose you need $1,000 earning 6% compounded monthly. How much you will have after 15 years?

Formula: A = P ( 1 + [ r / n ] ) ^ nt

A = 1000 ( 1 + [ 0.06 / 12 ] ) ^ (12 * 15)

A = 1000 ( 1 + 0.005) ^ 180

A = 1000 ( 1.005) ^ 180

A = 1000 * 2.45409

A = 2454.09356

Compound Interest Results

The calculation states that after 15 years you would have around $2,454, meaning that $1000 is the principal amount and $1454 is the interest that you would get within the duration of 15 years. 

Important Notes for Borrowers

In most cases, borrowers don’t like paying huge interest. Eventually, various borrowers also don’t understand the types of interest and the way it works. A few of the common issues that a number of borrowers face are:

  • Grievances related to paying back more in terms of interest over the duration of the loan compared to the principal amount borrowed
  • Grievances related to a huge loan payment being applied to interest rather than the principal amount
  • Grievances regarding interest rate being too high while comparing variable and fixed interest rates
  • Grievances that they don’t make tremendous progress in paying the principal amount of a loan, and have to keep on paying for several years

It is highly recommended for borrowers to have a better understanding of how interest works. They might apply less amount for your loans.

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