How is Simple Interest Calculated on a Loan?

Interest is a major part of a mortgage. Through out the term of a mortgage you must pay interest because that is what the bank is getting to lend you the money. There are a few different types of interest rates and often not knowing how interest works can leave you confused. Learning about interest on a mortgage is a must and it will help you in the long run.

Calculating Simple Interest

Simple interest depends on three key components. First of all when you purchase a mortgage loan you need to be aware of the interest rate or annual percentage rate that the lender is charging you for your loan. The interest rate is what makes your vehicle usually worthwhile. If you are purchasing a vehicle with extremely high interest rate, then chances are it is not worth it. The second component is the number of years you are waiting to pay your loan back in. The time can highly alter the amount of money you pay back for your vehicle. The third and final component is the principal. The principal is the amount of money that is being requested to pay back your loan. In order to calculate your simple interest you must use all three of these components. The correct formula to calculate interest is: Principal x Rate x Time=Interest. Knowing this formula can help you figure out your interest quick and easy.

Interest on a Loan

Because you can end up paying more in interest over the course of the loan then the principle, you must understand how important a low rate is. There is a minimum rate that a lender can charge. Often times a lender will add onto that to turn more of a profit and depending on your credit score you may be charged a higher rate. In any case you must know what your rate is and what you're being charged. Since interest is a payment for being lent money you should read over everything before you sign anything. Sometimes lenders will charge points along with your interest. Points tend to be 1% of the principal and can be added on your down payment to lower some of the interest paid.

Simple Interest Rates

Always remember that simple interest is calculated on the original principal only. Interest from prior periods must not be considered in the calculations for the following periods. Simple interest is usually calculated for a single period, in most cases less then a year. When calculating your simple interest be sure to have all of the proper information handy. If you ever have any questions about simple interest or interest rates in general do not hesitate to ask a lending professional.