Most people sooner or later turn to lending, since it is much easier to borrow money at interest than to borrow a significant amount from friends and acquaintances. In our life, sometimes events happen that are difficult to prepare for in advance, and there is not enough money left over for the "rainy day". Having read terrible stories in newspapers, when banks take away an apartment, a car and the last shirt for debts, most people try to prepare in advance for going to the bank. Having learned all the details of the loan at the bank, you can try to independently answer the question “how to calculate interest on the loan” and find out the size of the future overpayment.
Almost all banks currently issue loans, where monthly payments are annuity, that is, the amounts do not change in the payment schedule. Any payment consists of the amount of principal and interest on the loan (if there are no additional monthly commissions). At the very beginning of payments in the amount of monthly payments, the percentage of interest is higher, and then it gradually decreases, and payments on the main debt, respectively, increase. Sometimes, along with annuity payments, differentiated payments are applied when the amount of monthly payments is gradually reduced. So, how to calculate interest.
How to calculate interest on a loan.
Each annuity payment must have an annuity coefficient; all further loan parameters depend on it. In order to calculate the coefficient, the following formula is applied:
AK = KP * (1 + KP) N / ((1 + KP) N-1)
AK - annuity ratio;
KP - interest rate ratio
N - loan repayment period in months
KP or interest rate ratio can be calculated by the formula:
KP = PS / 1200, where PS is the annual interest rate advertised by the bank.
Now it’s not difficult to calculate the amount that you will need to pay the bank monthly.
Monthly payment = Annuity ratio * Loan amount.
Now let's calculate the total amount of debt, that is, the amount that you have to give to the bank for the entire loan term.
The total cost of the loan = Period in months * Monthly payment on the loan.
Well, now that we have wondered how to calculate the interest on the loan, let's calculate the size of the overpayment on the loan:
Overpayment on a loan = Total loan payments - Loan amount
Now you can easily plan your family budget and spending on a loan, since it is no longer a secret for you how to calculate interest.
Effective interest rate.
I would like to note one important point. You should clearly understand what you mean when you are trying to understand how to calculate interest on a loan. In addition to the annual interest rate at the bank, you may be voiced the effective interest rate. This rate includes all other loan overpayments plus the annual interest rate. This rate is much closer to reality than the usual annual rate on a loan.
Now a few words about the annual percentage. There are concepts such as simple and compound interest. Compound interest is accrued on the accrued loan amount plus past accruals. Simple interest is accrued on the original amount. So the annual percentage is a complex percentage, and it cannot be calculated if we take the initial amount of the loan. Why not? Interest is accrued each month on the balance of the principal debt, and not on the entire amount, and accrual is made on the basis of annuities.
Do not hesitate to ask the bank for an approximate payment schedule and compare the total amount of the overpayment with the one that you received. And do not forget to add all the fees and insurance amounts that the bank will certainly take from you when calculating the total loan amount.