How To Use The Simple Interest Formula When Shopping For A Loan

Posted on: 20 October 2015

When you're shopping for a short-term loan or a mortgage you should know how to calculate simple interest. Having a ballpark figure for how much interest you'll own over the life of a loan is a great way to figure out if that loan is right for you.

Calculating The Interest

In order to calculate the interest for your loan, you'll need to know the exact terms of the loan you're applying for. In the loan terms you will find the following numbers you'll need to calculate how much interest you will owe:

  • The Principal: The principal of a loan is the total amount of money you're borrowing from a lender.
  • Interest Rate: The interest rate of your loan is the percentage of your loan that will generate money for your lender at any given time. If the interest rate is written as a percentage, you'll want to turn it into a decimal by dividing the interest rate by 100.
  • Time: Time in this case, refers to how quickly the interest on your loan accumulates. This information is located in the terms of your loan and interest may accrue yearly, monthly or weekly.

Next, you're going to take these numbers and use them in the following formula:

Principal x Interest x Time

To solve the formula, first you will take the principal amount and multiply that by the amount of interest in its decimal form. Next, you'll take that amount from the previous multiplication and multiply it by the time value. After you solve this formula, you will know how much interest you'll owe for the life of the loan. If you add the total amount of interest owed to the original principal, you will know how much you'll owe for the entire loan.

Using Interest Rates To Shop For Loans

After you've calculated how much interest you'll owe for the life of the loan, you'll be able to determine if that loan's terms suit your needs. You may find that the interest rates lenders are offering you to be higher than you anticipated. If that's the case you may want to check out your credit score. By working to correct negative items on your credit report, you can work toward securing a lower interest rate for your loan.

Try A Simple Interest Calculator

If you don't feel comfortable calculating the simple interest rate on your loan yourself, there are many interest calculators available online. Depending on the interest calculator, it will allow you to change the variables of the principle, interest and length of the loan. Knowing the interest you'll owe on a loan is an invaluable tool to see if a loan is right for you.