3 Ways to Calculate Interest wikiHow

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Calculate the interest. To calculate interest, multiply the principal by the interest rate and the term of the loan. This formula can be expressed algebraically as: I = P ∗ r ∗ t …

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1. Determine the principal. The principal is the amount of money that you will use to calculate the interest. This could be an amount of money that you deposit into a savings account or bond of some kind. In that case, you will be earning the interest that you calculate. Alternatively, if you borrow money, such as a home mortgage, the principal is the amount that you borrow, and you will calculate interest that you owe. In either case, whether you will be collecting the interest or paying the interest, the amount of the principal is generally symbolized by the variable P. For example, if you have made a loan to a friend of $2,000, the principal loaned would be $2,000.
2. Determine the interest rate. Before you can calculate how much your principal will appreciate, you need to know by what rate your principal will grow. This is your interest rate. The interest rate is generally advertised or agreed upon between the parties before the loan is made. For example, suppose you loaned money to a friend under the understanding that at the end of 6 months your friend would pay you back the $2,000 plus 1.5%. The one-time interest rate is 1.5%. But before you can use the rate of 1.5% you must convert it to a decimal. To change percent to a decimal, divide by 100: 1.5% ÷ 100 = 0.015.
3. Measure the term of the loan. The term is another name for the length of the loan. In some cases, you will agree to the length of the loan when you borrow it. For example, most mortgages have a defined term. For many private loans, the borrower and lender may agree to any term they wish. It is important that the length of the term match the interest rate, or at least be measured in the same units. For example, if your interest rate is for a year, then your term should be measured in years as well. If the rate is advertised as 3% per year, but the loan is only six months, then you would calculate a 3% annual interest rate for a term of 0.5 years. As another example, if the rate is agreed to be 1% per month, and you borrow the money for six months, then the term for calculation would be 6.
4. Calculate the interest. To calculate interest, multiply the principal by the interest rate and the term of the loan. This formula can be expressed algebraically as: I=P∗r∗t{\displaystyle I=P*r*t} Using the above example of the loan to a friend, the principal (P{\displaystyle P}) is $2,000, and the rate (r{\displaystyle r}) is 0.015 for six months. Because the agreement in this example was for a single term of six months, the variable t{\displaystyle t} in this case is 1. Then calculate the interest as follows: I=Prt=(2000)(0.015)(1)=30{\displaystyle I=Prt=(2000)(0.015)(1)=30}. Thus, the interest due is $30. If you want to calculate the amount of the full payment due (A), with the interest and the return of the principal, then use the formula A=P(1+rt){\displaystyle A=P(1+rt)}. This calculation would look like: A=P(1+rt){\displaystyle A=P(1+rt)} A=2000(1+.015∗1){\displaystyle A=2000(1+.015*1)} A=2000(1.015){\displaystyle A=2000(1.015)} A=2,030{\displaystyle A=2,030}

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