When a person borrows money or assets then lender charges some money as a fee that is called as Interest. Interest may be Simple Interest or Compound Interest. Now let us see how to calculate loan interest.
Basically interest is charged on principle of loan.
There are some instructions that we need to follow in order to calculate loan interest.
1: First we have to understand the basic idea of the compound interest. Compound interest is calculated on basis of both simple interest and principal. Since all lenders charge annual interest on the loan and lenders want to get interest monthly so borrower has to pay one twelfth of the annual interest every month.
2: We have to calculate the monthly payment on loan. If we want to get payment monthly then we divide interest by 12.
3: Three basic things that we need to calculate the loan interest are principal amount, rate and time Period. We can calculate loan interest if we have these three parameters.
4: To calculate simple interest over a loan we can use formula which is:
I = PRT,
'I' is the interest, 'P' is the principal amount, 'R' is the rate of the interest charged and 'T' is the time period.
5: To calculate compound interest we need interest and principal amount as well. This is calculated by Combination of both interest and principal.
We can calculate compound interest on a loan with help of formula that is:
M = P (1 + i)n, C.I. = M – P.
Here 'M' is final amount, 'P' is the principal, 'I' is the rate on the loan and 'n' is the number of years.