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How Is Loan Interest Calculated?

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Most people fully understand how borrowing works: you get a loan that you eventually will repay, in addition to an interest, or a fee, for being able to use the lender’s money at your convenience.

Interest helps those who lend to get a profit from making their resources available. The question is, how much should you expect to be charged as interest for your loan? Let’s explore together how to get this number right.

How to Calculate the Total Loan Interest?

Usually, the lender will inform you about which method they use to calculate the interest rate. The most common choice is simple interest. To calculate simple interest, you’d need to have the following information: loan amount, interest rate, and the period of repayment.

Loan Amount.

The size of your loan is usually proportional to the size of the interest that is charged. The bigger the loan, the higher the interest will be. For instance, David has a loan of $20,000 with an interest rate of 4% and a 5 years term; the total interest for him to pay would be $4,000. A smaller loan, say $5,000 with the same 4% interest rate and 5 years term, will require a total interest of $1,000 —a significant decrease.

Period of Repayment.

The more time you will have to repay the loan, the higher will be your interest. Let’s illustrate this with an example. Ashley took a $10,000 loan for 2 years, with an interest rate of 4 percent. Her total interest rate would be $800. If she can commit to repaying in a shorter period, say 1 year, her total interest will not exceed $400.

Interest Rate.

The credit score of a borrower. It is a 3-digit number from 300 to 850 that shows your position. The higher the score, the better your loan options and the lower is your interest rate.

  1.  800-850: exception credit
  2.  740-799: excellent credit
  3.  670-739: good credit
  4.  580-669: fair credit
  5.  300-579: bad credit

Loan-Value Ratio.

It shows if you have made an initial deposit or not. A higher deposit usually means a lower interest rate.

Purpose.

The purpose of your loan can be buying a car, a house, or covering your personal expenses. Depending on that, your interest rate can change. For instance, a mortgage traditionally has low-interest rates, but it also depends if you’re buying a house to live in or to rent as an investment. Is it your first or a second house? All those elements will help to identify the interest.

Secured or Unsecured Loans.

Your total interest rate can then be calculated in the following way: multiply the number that corresponds to your loan amount, interest rate, and the period of repayment in years. For instance, if you have a 3 years loan for $10,000 with an interest rate of 3 percent, your total interest is calculated this way:

$1000 x 0,3 x 3 = $900 in interest

Always read about fees and rates at Payday Depot before you choose the type of loan to take; that will help you to calculate your loan interest in no time.