Instructions – Simple Interest
1.
Step 1
Obtain the information required to calculate the total amount of interest to be paid.
The principle, the interest rate and the length of the loan is needed. The interest
payment will be in the same units as the principal.
2.
Step 2
Use the amount of money you wish to borrow as the principal. Ensure you use the
same units of currency that you want the interest payments expressed in.
3.
Step 3
Express the interest rate as a decimal fraction of the interest rate for the payment
period. For example, the interest rate should be given to you as an APR but the
payment period is usually monthly. In this case, we would divide the APR by 100 to
get a decimal fraction and then by 12 to convert the annual rate to a monthly rate. In
other words, divide the APR by 1,200 to get the monthly interest rate.
4.
Step 4
Convert the units for the length of the loan to the same units as the payment period.
For example, if the length of the loan is in years and the payment period is in
months, you would need to multiply the length of the loan by 12.
5.
Step 5
Look at the following example to calculate the simple interest. You wish to borrow
$1,000 and the bank has offered to loan you this amount at 3.5 APR for 18 months.
The interest payment is calculated as I=PRT. P is the principal, which is $1,000. R is
the rate, which will be 3.5/1,200 because you will be making monthly payments. T is
the term of the loan in months, which is 18. Therefore, I = 1000 x 3.5/1,200 x 18 =
52.50. The total interest on this loan will be $52.50.
Instructions – Compound Interest
1.
Step 1
Define your terms. Any interest calculation will require you define several terms. You
will need to know the following: P equals principal. I equals interest rate (as a
decimal). N equals the number of times that the interest is compounded in a year
(monthly is 12 and quarterly four). T is the time expressed as the number of years
for the calculation; and A is the answer after T number of years.
2.
Step 2
Plug your terms in to the follow formula: Divide I over N [I/N]. Add 1 [1+ (I/N)].
Multiply by P [ P(1+ (I/N)) ] and save this number. Multiply N by T [ NxT ]. Finally,
raise the answer from 3 to the power of the answer to 4 [ans3^ans4].
3.
Step 3
Note the following example: P equals 1,000. I equals .1 (10 percent). N equals 4
(quarterly) and T equals 2. So the calculation is .1/4 = .025; 1+.025 = 1.025; 1,000 x
1.025 = 1025; 4x2 = 8 and 1,025 ^ 8 = 1,218.40. The figure 1,218.40 is the total paid
for a $1,000 loan at 10 percent after two years with quarterly interest.