Doing The Math On Loan Interest, A Vital Step

Posted on August 22, 2008
Filed Under Loans Expert |

Interest can be confusing. Trying to figure out how much a Loan is costing you is something you want to do, but many people say “Forget about it.” when they start trying to do the math.

The problem with figuring interest is that it is not always calculated the same. You have to begin with reading the terms of your Loan agreement. You should be able to find out exactly how the interest is calculated in there.

To give you a basic idea, here is the formula for figuring interest for a one month period. The Loan amount is $1000 and the interest rate is 5%.

Multiply $1000 and 5% (which is equivalent to .005)
The answer is $50, which is the interest you would pay for that month.

You may be thinking that is easy, but you usually have a Loan for longer than one month. So you have to figure interest for each month in the life of the loan. There’s also a big factor called compound interest where you’re paying interest rates on the interest accrued.

Sometimes it is easiest to go to your lender and have them figure it for you. This is really important in terms of understanding the full scope of a loan. It will save you some headache in the long run and it’s a service your lender should offer…to show you everything detailed in black and white.

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