How Interest Loan Formulas Work
If you want to know how interest loan formula work, then you have to know about the interest formula that expresses the time-money relationship. As a rule, there is a definite annual interest rate for borrowers, even if interest is not calculated annually.
When you want to change from once-applied interest to a semi-annual interest, the annual interest rate is converted to a semi annual interest rate. For instance, if the annual interest rate makes up 10% and a loan is $1000, we divide annual interest rate by the number of semi-annual periods and get 5% semi-annual interest rate. Thus, at the first half of the year you’ll have to pay 1050 and at the second half 1102.50. As a result, the interest rate gets half less but is multiplied to the amount twice.
In case the interest should be applied every quarter the annual interest rate is divided by 4 and is multiplied to the amount 4 times.
When you deal with simple interest, interest is calculated only of the principal (the primary sum of money obtained). So, the amount of interest that is added over the interest life remains stable during the transaction. It means that if you take a loan of, let say, $1000 and the annual interest rate is 10%, you’ll pay additional $100 a year, no matter how much the loan has fallen. In case with simple interest the total amount of payments is easy to compute. The formula is the following: I = (iP)N (where I is the total interest due; P is the Principal; i is the interest rate; N is the number of times interest is applied).
Though it should be said that simple interest is not that popular as compound interest.
Compound interest is received over a period computed on the original sum basis including interest obtained from previous periods. Let’s imagine that the compound interest is c% and the initial investment is £Q. Then the gross amount of the investment after n years can be calculated according to the following formula: £Q x ( ( 100 + c ) / 100 )n
It’s easier to use a calculator though. You can find it on the top right sidebar on this page.
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