How to calculate the interest on a loan? Here's how to avoid mistakes

Are you thinking about taking out a loan, but don't quite understand how to calculate the charges and fees? Don't worry, because we can help you! In this content, we will teach you how to calculate interest on a loan. Follow us to learn how to calculate interest on a loan without mistakes!

How is interest charged on a loan?

To arrive at the definitions of interest charges, it is important to understand that the process will depend on different factors and conditions of your loan contract.

Initially, financial institutions take into account the risk of default of the borrower. In other words, depending on the borrower's profile and the type of loan requested, the interest rate may vary, and may be higher for loans considered to be of higher risk.

For example, this assessment is what generates the difference between the interest rates applied to a personal loan and a payroll loan. Furthermore, since it is discounted directly from the payroll, it tends to have lower rates due to the lower risk of default.

While personal loans, which do not have this guarantee, tend to have higher interest rates.

How to calculate loan interest?

Calculating interest can be confusing, especially if you are unfamiliar with the concepts or have never encountered interest rates before.

First of all, there are different types of loan interest, so it is important to understand each one and its calculation formula. 

To make things easier, there are two main types of interest: simple and compound. Each has a different way of being calculated. 

Want to know how to calculate interest? Check out more details about the process below so you don't make any mistakes.

Calculation of simple interest 

With simple interest, the interest rate is applied monthly to the amount you have contracted. This makes it easier to know exactly how much you will pay at the end of the period.

To do this, you need to follow the calculation formula, which is very simple. Check it out below:

Formula: J = C x I x T

• J = Interest
• W = Capital (amount borrowed)
• I = Interest rate (in decimal)
• T = Time (in years or months, depending on the rate)

Calculation example: let's assume you took out a loan of R$2,000.00, with a term of 24 months (2 years) and a rate of R$101.003 per year. The interest calculation will be as follows:

Values

• C = R$ 2,000.00
• I = 10% per year = 0.10 (dividing 10 by 100)
• T = 2 years

Apply to the formula: J = 2,000 × 0.10 × 2

Calculate:

• J = 2,000 × 0.10 = 200
• J = 200 × 2 = 400

So, following this entire process, you will have the total interest you will need to pay, being: R$ 400.00. This way, including the interest, the financial institution will receive back R$2,400.00.

Compound interest calculation

Compound interest is widely used by financial institutions in almost all credit operations, especially in loans, as it offers greater profitability.

Simply put, we can understand compound interest as “interest on interest.” That is, each period, interest is calculated not only on the initial loan amount, but also on the interest that has already accumulated up to that point. 

See what the calculation process is like, including the formula! 

Formula: M = C(1 + I)T

In this example, we will work with the loan amount of R$1,000.00 at a rate of R$51,000.00 per year for 3 years. To calculate the total amount you will have to repay, simply use the formula, including the values:

• M = Total amount
• P = Initial capital (R$ 1,000.00)
• I = Interest rate (5% or 0.05)
• T = Contract period (3 years)

Apply to the formula: M = 1,000 x (1+0.05) 3

Calculate: 

• M = 1,000 x (1.05) 3 
• M = 1.000 x 1.157625
• M = 1,157.63

Therefore, at the end of 3 years, you will have to pay back approximately R$1,157.63. In other words, the interest amount will be R$1,157.63 on this loan.

There you go! With these tips, you now know how to learn how to calculate your interest, even before you start the loan process.

Written by

Juliana Raquel