# How to Calculate a Simple Interest Payment

Simple interest loans are common in everything from a home mortgage to a personal loan. With a simple interest loan, the amount you’re borrowing is the **principal**. the length of the loan is the **term**. the money you pay for the privilege of borrowing is the **interest** and the date on which the loan is to be paid in full is its **maturity date**. Although you can use a calculator to determine a simple interest payment, understanding what’s behind this calculation is a useful money management skill.

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## The Formula

The simple interest formula is **I = PRT:**

- I is the amount of interest expressed as a dollar value
- P is the principal
- R is the annual rate of interest
- T is the loan term expressed in years or a fraction of a year

For example, if you borrow $5,000 at a 5 percent annual interest rate for one year, you’ll pay **$5,250** -- **$5,000 x 0.05 x 1** -- on the maturity date.

In the same way, if you borrow $3,000 at a 5 percent annual interest rate for six months, you’ll pay **$3,075** -- **$3,000 x 0.05 x 6/12** -- on the maturity date.

### Step 1: Calculate a Monthly Payment

**The formula is P/loan term in months.**

The monthly payment on a 12-month, $5,000 loan will be **$5,000/12 or $416.67** each month.

The monthly payment on a six-month, $3,000 loan will be **$3,000/6 or $500** each month.

### Step 2: Calculate Monthly Interest

The monthly interest on a $5,000 loan at a 5 percent annual interest rate for one year will be **$5,000 x 0.05 x 1/12 or $20.83** .

The monthly interest on a $3,000 loan at a 5 percent annual interest rate for six months will be **$3,000 x 0.05 x 1/12 or $12.50** .

### Step 3: Determine the Total Monthly Payment

Add the monthly principal and interest payment to get the monthly loan payment:

- The monthly loan payment on a $5,000 at a 5 percent

**$416.67 + 20.83 or $437.50**.

interest rate for six months will be **$500 + $12.50 or $512.50** .

## Calculate a Short-term Loan Payment

You’ll need to convert days into a portion of a year to calculate the payment on a short-term loan with a maturity date measured in days rather than months. These loans are usually paid in a lump sum on the maturity date.

### Step 1: Convert Days to a Portion of a Year

### Step 2: Calculate total Interest

The formula is **P x I x T** :

### Step 3: Determine the Total Amount Owed

Source: ehow.com

Category: Bank