How to Calculate Interest on Loan

Interest on the loan is the part of fixed cost of your business whether you have produced anything or not, you have to pay interest on the loan. Whether you have earned money or not, you have to pay the interest on loan. So, it is very necessary for you to calculate it and separate your earning in any box for paying interest on loan timely.

One more benefit of calculating interest on loan, you can choose best loan plan. Best loan plan is the plan whose cost of debt will be minimum. For making improved financial plan and control on your cash fund, we are teaching to calculate interest on loan.

1. Collection Basic Information

For calculating interest on loan, you should collect the basic information. What is the amount of loan, you have taken. What is the rate of interest? Whether it is annual interest rate or monthly interest rate. What is the total period for taking loan.

 2. Know Whether Interest is Simple or Compound 

.On the basis of your agreement with the party, you should know whether interest is simple or compound. In compound interest, you have to pay interest on collected interest. So, both formulas will be different for calculating interest.

3. Calculation of Interest

We can calculate simple interest by following formula

 = principle X (rate of interest / 100) X time


Example : 

Calculate simple interest on $ 3200 for 3 years at 8% per annum.

Simple interest = 3200 X 8/100 X 3 = $ 768

We can calculate the compound interest with following interest

= Principle ( 1 + r/100)^t – Principle 

 Example : 

Find the compound interest on $ 8000 in 2 years at the rate of 5% compounded annually.

C.I. = 8000 ( 1+ 5/ 100)^2 – 8000 = $ 820

Sometime, you may pay the compound interest and principle together. At that time, we did not deduct principle for calculating amount.

 For example, you have take loan from ABC company. You have taken $ 50000 and the rate of interest is 5% per annum compounded half yearly. Find the amount thus you will paid after a year and a half.

Principle = $ 50000, rate of interest = 5% Time = one and half year or 3 half years

 Total payment = 50000 ( 1+5/100)^3 = $53844.53

Related : How to Calculate Interest in Tally 9

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Accounting Education: How to Calculate Interest on Loan
How to Calculate Interest on Loan
Accounting Education
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