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How to calculate interest payments

how to calculate interest payments

Things You'll Need


Write down your initial principal, your APR and your loan term. Convert your term and APR to the interval you want for your payments. For instance, if the loan term is expressed in years, multiply by 12 to get the number of months for a monthly payment plan. Likewise, divide the APR by 12 to get a per-month interest value. If you want to calculate a biweekly payment schedule, use 26 instead of 12.

Principal: $5,000

APR: 6 percent = 0.06/year = 0.005/month

Term: 5 years = 60 months

Plug these values into the equation for a principal and interest payment and perform the calculations. The graphic contains the example.

L = loan principal = 5000

c = periodic rate (monthly in this example) = 0.005


= term (number of months in this example) = 60

P = principal and interest payment = $96.66/month

Multiply the principal by the periodic rate to determine the amount of interest in the first payment. Subtract that number from the monthly payment to determine the amount of principal.

5000*0.005 = $25 interest

96.66-25 = $71.66 principal

Subtract the principal payment from the loan principal and repeat the previous step using the new principal balance.

5000-71.66 = $4928.34 principal balance

4928.34*0.005 = $24.64 Interest

Repeat the process until you have reached the end of the loan term and the principal balance is zero. It helps to use a spreadsheet program. The result is an amortization table for your loan showing the amount of principal and the amount of interest in each monthly payment.

Category: Bank

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