How is Personal Loan’s Interest Calculated?

Whether it is an educational expense, medical emergency, or a family emergency, a personal loan can help you cover costs. Personal loans really come in handy to ward off the financial pressure from your shoulders especially if you don’t have collateral security or anyone to turn to. It is the fastest way to secure money. 

However, as advantageous, it may be there is a downside to securing a personal loan. Basically, the money you borrow must be repaid over time with interest which is sometimes exorbitant. In this article, I’m going to look at how personal loan interest is calculated.

Interest on a Personal Loan Explained

Interest refers to the amount of money that you pay to the lender every year on the outstanding loan amount. It is used by lenders to make a profit from the personal loans that they give to their clients. Interest on personal loans is generally paid occasionally as a percentage of the remaining loan amount.

However, since personal loans are unsecured loans that you can take without putting up collateral, the interest rates on personal loans is slightly higher as compared to secured loans.  The personal loan interest fees are basically capped at 4% per month.

Calculating a Personal Loan’s Interest

It is highly recommended that when you are borrowing money from a lender you calculate your interest rate. To calculate interest rate, you can either use an online interest calculator or you can calculate by yourself.

Here is how you calculate a personal loan’s interest:

Interest calculation
Source: Unsplash

Determine Your Annual Percentage Rate

Firstly, you need to figure out your interest rate per month. To do so you have to know your annual percentage rate. You can find this figure on your most recent statement or original loan agreement. Use variable “i” to represent interest rate.

Figure Out The Number of Pay Periods

To figure out the number of pay periods, you can either use a formula that takes into account the total number of pay periods for the life of the loan or you can simply use a standard 12-period payment plan. The standard 12-period payment plan is highly recommended because it is applicable irrespective of whether the loan term is longer or shorter. Use the “n” variable to represent the number of pay periods.

Convert The Annual Rate to a Monthly Rate

Before you determine your monthly interest payment, you first have to convert the annual percentage rate into a monthly rate. To do so you simply divide the interest dividend by the number of payment periods. Here is the formula to use when converting annual rate to monthly rate:

Monthly interest rate = i / n or   Monthly interest rate = annual percentage rate / payment periods

Calculate the Monthly Interest Payment

Lastly, when you have found the monthly interest rate, use the number you would have gotten to find the amount of interest owed each month. To do so you simply multiply the monthly rate by the balance of the loan. Use this formula to calculate:

Monthly interest payment = monthly rate * principal balance

Basic Example of How You Calculate the Interest Rate 

This is the basic formula you use to calculate interest rate:

Loan Principal*Interest Rate = Interest

Let’s say James borrowed $100,000 at an interest rate of 12% per year: $100000*0.12=$12000 this means he is going to pay $12000 per year on interest.

Interest calculation method
Source: Unsplash

Conclusion

In summation, whether you are planning a vacation or you need money to further your studies make sure you secure a personal loan from a reputable money lender like UK Credit – here is the link to the website ukcredit.sg. They offer personal loans with low-interest rates and easy repayment terms.

In order to protect yourself from unfair discriminatory practices regarding interest rates and fees, it is best if you calculate the interest rate by yourself. Simply follow the aforementioned steps to guide you.

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