How is loan interest calculated

how is loan interest calculated

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This topic is part of the Algematics help database, and shows you how you can use Algematics to solve simple interest problems.


When you borrow money, if the repayment amount is calculated based on simple interest (also known as flat rate interest), interest is charged each year on the full amount borrowed at the beginning.

To calculate the total interest, ' I ', that you will pay on a simple interest loan, you use this formula:



' P ' is the 'principal', the amount borrowed.

' R ' is the 'rate' percent of interest per year. The rate is calculated by dividing the yearly interest percentage by 100. For example, if 12.5% interest is changed per year, then R = 12.5 ё 100, = 0.125

' T '

is the number of years that you will be paying back the loan.

You have to pay back both the principal that you borrowed, as well as the interest. If you make monthly payments, you can easily calculate the payment amount. Just add the total interest to the principal, then divide this by the number of months that you will be paying the loan back.


To buy a computer, Tom borrowed $3000 at 9% simple interest calculated yearly. If he will be making monthly payments for four years, calculate:

(a) the amount of interest to be paid,

(b) the total amount to be paid back,

(c) the monthly payment amount.

Example 2

When Jane bought her V.C.R. she borrowed $500 at 5% simple interest. The total interest payable over the period of the loan is $50. How many years will it take her to repay the loan?

To do both of these problems, you enter the simple interest formula: I = PRT. substitute for the known quantities, simplify to a final answer, then answer the specific questions. These steps are explained below.


Category: Credit

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