How do you calculate interest on a loan?


How do you calculate interest on a loan?

Taking out a loan is a big commitment. It’s really important that when you do borrow, you’re confident you’ll be able to meet your repayments every month.

That’s why it makes sense to work out how much you’ll have to pay back each month. But, because you’ll be paying interest on the loan, it can be difficult to work out just how much you’ll have to repay. Luckily, there are tools out there to help.

Use a loan calculator

Working out how much interest you have to pay on a loan is very difficult to do in your head, which is why loan calculators exist.

Thankfully, all you have to do is put in how much you’re looking to borrow, how long the loan term is and what the APR is.

And, you don’t even have to go far to find yourself a loan calculator. You can use Ocean’s loan calculator for free by heading here.

Once you input the necessary information, you’ll be given an idea of how much you can expect your monthly payments to be. Alongside this, you can see how much you’ll pay back in total over the course of the loan. The cost of credit will be how much you end up paying in interest, as well as any fees you might have to pay.

It’s a good idea to use a loan calculator before you apply. Although how much you’ll be able to borrow and how much interest you’ll pay is decided when you apply, it helps by giving you a general idea of how much you can expect to pay out each month.

This means you can compare it with your income and outgoings to see if you’ve got room in your budget to make these payments.

Why doing the maths yourself is difficult

While it’s probably not something you want to spend your afternoon doing, you might be wondering what it is that makes working out loan repayments without a loan calculator so difficult.

Basically, it’s to do with the way the interest is calculated.

Every time you make a loan repayment, the amount you owe decreases. How much you pay in interest each month depends on how much money you owe, so you should pay gradually less in interest as each month passes.

So, as an example, you borrow £10,000 over 10 years at an APR of 6%. It might jump out at you to simply work out 6% of £10,000, but this doesn’t quite cut it. As the amount you owe decreases each month, the amount in interest you pay each month goes down too.

For this reason, it’s not simply a case of getting a pen, paper and regular calculator out to do a little bit of maths.

Thank goodness for loan calculators!