Loan Interest Formula
You can look for these key factors. The first is simply the balance that you begin the loan at. This is a simple enough number since it was probably discussed with you or set by you. The next is the annual percentage rate (APR). That number is one that you may or may not have. You may should be able to find it somewhere in the agreement though. It may have been referred to as the interest rate as well. Next you will need to determine if, and how often, your interest is compounded. Typically in the past it has been something like daily, monthly, quarterly, or yearly. Now you are ready to determine your loan interest formula.
It will begin with the balance. You multiply that times the APY. That gives you the yearly interest. Okay here you need to divide the yearly interest by whatever factor you want to know (i.e. the number of months to get the monthly rate; the number of days to get the daily rate; the number of hours to get the hourly rate). Now you have the interest that balance will earn in a specific period of time.
That is without compounding. If your loan compounds the interest you will need to calculate for each compounding period. If it compounds quarterly, you will need to calculate for the quarter. Begin with the balance. Multiply that times the APY. That gives you the yearly interest. Divide the yearly interest by the factor of your compounding (i.e. for quarterly compounding divide by four, for biannual compounding divide by two). Now you have the interest earned in the first compounding period. To compound you add that amount to your balance. Now, you have a new (larger) balance to begin the next compounding period.
This is how debt grows. With compounding your debt could potentially grow if you make any payment smaller than the amount of interest your account accrues in the compounding period. The timing of your payment is crucial as well. If it comes before the compounding you can save money by reducing the balance interest is charged to. The details regarding this should be available in your terms and conditions. Some fees such as late fees and others probably do not accrue interest, but you should verify this in your contract.
