Useful tips on how to calculate interest rate on loan amount

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Lists of bank debtors are growing. To avoid troubles with the banks, borrowers need to know how to calculate interest rate on loan amount and their opportunities in this regard. We will reveal some useful secrets to you in our post below.

How to calculate interest rate on loan amount

Nigerians often take loans. In all cases, the reason is one – right now they need money and there is no way to get it except as in a form of a loan. If you want to buy the cherished thing, to have an unforgettable vacation, organize a wedding, get an education or apply for medical services, the bank will give you money to fulfill any of your whims.

Use this possibility but remember that commercial organizations don’t make gifts and you will have to turn money back. Banks try to protect their interests, minimize risks, requiring the borrower to confirm the return of the debt, provide the collateral. In other words, the fewer opportunities a future debtor has, the higher the risk of the lender and the rate on the loan. Manipulating the rates and terms of the loans, banks constantly offer more and more credit products creating the illusion of choice.

Remember: knowing how to calculate interest rate on a loan will help to allocate properly your expenses and not to overpay.

How to calculate interest rate

Before registering a loan, it is necessary to find out about the real sum of overpayment. The person assumes the amount and term of the loan and the bank tells about the rate, the scheme for calculating the interest, and the presence of additional payments.

Types of interest calculation schemes

Most of the banks have two schemes for loan repayment for borrowers: simple interest and compound interest.

It is worth noting that it is difficult to use a traditional calculator to make such calculations and it’s easy to make a mistake. It’s better to use Excel spreadsheets or special loan calculator (they are now available on sites of almost all the banks you may be interested in).

Simple interest

A simple scheme means that the interest is always calculated only on the initial amount for each period of time.

Example: a loan of $5000 with 20% interest per annum. According to the simple interest scheme, in first, second, and any other year the interest will be $1000. To find out the interest for N years, simply multiply the profit with N.

In this case, $5000 is the principal amount (P), 20% is our rate (R), 2 years is out period of the loan (t), the final amount of the loan with the interest will be (A). So, to calculate A we need to use the formula A=P(1+rt) where r=R/100. Taking our example, A= 5000(1+0.2*2)=7000.

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How to calculate loan amount

Сompound interest

The compound scheme means that the interest on loan is charged for each period taking into account the initial amount and all interest received before.

Example: a loan of $5000 with interest 20% per annum. In the first year, the interest will be $5000*20% = $1000, in the second ($5000 + $1000) * 20% = $1200, in the third ($5000 + $1000 + $1200) * 20% = $1,440 and so on.

Every time bank wants to “scroll” its money several times through an investment tool, it faces the compound percentage. The profit received in the first round is reinvested and the income charges to a larger amount.

interest rate

It is useful to know: the difference between simple and compound interest at first glance seems to be not so great. But the more time passes, the more obvious is the advantage of simple interest.

There is also Euribor (European Interbank Offered Rate), which is fixed in the loan agreement for a specified period during which the rate does not change. For example, a six-month Euribor is specified in the client contract. Then the rate changes every six months.

What else affects the interest on the loan?

Often people start to compare offers of banks and choose those where the interest rate on the loan is the lowest. But in fact, it turns out that the real amount that should be paid by the client is much higher than declared in the advertisement of the bank.

In addition, banks attract potential borrowers in the streets, shopping centers, markets, beckon and call to take a loan without interest, and bank managers “forget” to inform about the additional services that the bank renders and which will have to be paid. But we are adults, so do not believe in fairy tales and understand that commercial organizations will not work for free. Therefore, if you are offered an interest-free loan, be prepared to pay for various bank services that you can’t refuse.

How to calculate interest rate on loan amount

The responsibility of the bank should include the borrower’s notification of the full cost of the loan and the interest rate. These data should be provided not only in the payment schedule but also on the first page of the loan agreement.

All payments for the credit organization, insurance company, and other institutions are included in the calculation if this follows from the terms of the contract. Making a partial early repayment allows the client to make a choice about what will be reduced: the period or amount of payments.

It is useful to know: it is more advantageous to reduce the duration of loan payments. It is simple to calculate the total overpayment: just sum the amount of interest for the crediting period, all insurance and additional payments.

Bank penalties may be charged for late repayment of the loan.

interest rate

Insurance premiums are levied for insurance services which are not obligatory in most cases. They are present not in all types of lending and may be optional. However, in deals of mortgages and car loans, in most cases, apartment or car insurance is a prerequisite for granting a loan. This is understandable: the bank wants to reduce its risks in the event of a loss or a significant reduction in the value of the pledged property.

It is useful to know: a number of credit organizations force clients to compile the policy declaring that this is an obligatory procedure and sending people to partnership insurance company with unprofitable tariffs. In such cases, it is better to refuse to obtain a loan or apply for the protection of your rights in court.

Banks are required to provide full information about all payments on the loan. In addition, some commissions on individuals are recognized by the court as illegal. Such payments are often included in the text of the contract in small print or in the form of a reference to the rates of the credit institution. It is unacceptable! Be careful.

loan amount

Other services of the bank may be provided in the contract but not directly relate to the performance of the loan (for example, mailing or transfer of funds).

So, comparison of credit offers of different banks should be made not only on the basis of the size of the interest rate. Also, the repayment schemes, insurance, and additional payments arising from the contract should be considered. Own calculations, the help of the Internet, and specialists from financial organizations can help you.

Useful recommendations

After you make the last payment and repay the loan, take in the bank a certificate with a signature and seals stating that the loan has been fully paid. This is necessary in order to avoid the situation when there are some unpaid small amounts about which you have not been notified by the bank and for which the interest will be charged.

loan amount

Then a few months later, when you are sure that you have repaid the loan, this amount will be presented to the mandatory payment.

Close the account in the bank, write the appropriate document. Account maintenance can cost money. You do not need an account anymore. Why should you pay?

Keep and do not lose documents on your credit history even after the loan is closed. This is a loan agreement with attachments, receipts for payment (it is desirable to make copies – receipts fade with time) and all other documents that are connected with your loan.

loan amount

We hope that it was useful for you to find out how to calculate interest rate on loan. If life circumstances forced you to borrow money, be extremely careful and then you will not have to face financial problems. Good luck!

READ ALSO: How to transfer money from Ecobank using phone?



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