# Loan Articles

It is relatively challenging to calculate interest on a personal loan because of the math involved. If you are not a math whiz, you will probably have a hard time, so make sure you get someone who is good at it to do your calculations for you. Calculating interest on a personal loan starts with the loan amount and the annual interest rate. The loan costs are a function of the loan term and the interest rate. They also depend on whether simple or compound interest is charged. Simple interest is based on the original loan amount only. Compound interest is based on the original loan amount and the added interest during the compounding period, for example five years. Tools such as loan calculators are available online. You can use them to define the interest amounts or use standard formulas to determine the interest amount on the loan, whether it is a personal loan, business loan or another type of financing.

Simple interest is equal to the loan amount (principal) multiplied by the annual interest rate and the length of the loan. The interest rate is expressed as a decimal – for example, 6 percent interest over one year is 0.06. If the loan term is 10 years, then the third number is 10. Simple interest is just that – simple. For a
loan of \$5,000 at 10 percent interest over three years compounded annually, the first number is 5,000, the second - 0.10, and the third - 3. The formula for compound interest is the loan principal multiplied by the sum of 1 and the interest rate, to the power of the loan term minus the loan amount. In the example above, the value of the compound interest is going to be 5,000 (1 + .10) ^3 - 5,000.

The interest rate is normally expressed in the form of an annual percentage rate. For this reason, it is important to use the number of years to repay the loan, and not the number of months, when you make interest calculations.

You can use the formula to determine the amount you will be paying back in two or four years. This way, you will find out the payment amount that will suit your budget best. Short term loans are typically offered with higher interest rate, and you may find this option unappealing at a first glance. However, keep in mind that with long term financing options you will end up paying much more in interest.

That said, the formula above may be relatively simple, but it does not in any way take hidden costs into consideration. As we all know, hidden costs are part and parcel of all loans, be they personal or business loans. The hidden costs are based on the type of loan, and personal loans can vary tremendously. Late payment fees and other penalties are among the fees that increase the loan amount. Make sure you take the time – at least one month after your formal application - to compare personal loans and lenders so that you have a comprehensive view of the offers, which are available to choose from. It also depends on the type of personal loan you want – car loans, holiday loans, student loans, mortgages, etc.