Calculation Interest Personal Loan

Interest is a fundamental aspect for those who take out a personal loan of any amount. Let’s find out how to calculate the interest due on a loan by applying the formula for calculating interest to a practical example.

Image result for personal loanWhat interest do you consider for the calculation?

To calculate the interest on a personal loan, it is good to consider the APR , ie the global interest rate, which takes into account not only the pure interest, but also the incidental expenses that contribute to determining the loan installment. For this reason, the TAN is less indicative than the APR, which also lends itself to use for the comparison of several personal loans, as it is the indicator that most is able to indicate the actual cost of the loan.

The formula for calculating interests

The calculation of the interests of a personal loan is not different from the general interest formula. The interest is in fact given by the multiplication of capital, for the days of the loan term, multiplied by the rate applied, all divided by 36,500.
In case the applied interest is annual, the formula is simpler and corresponds to the multiplication of the capital for the rate, all divided by percent.

Let’s take a practical example .
One man applied for a loan of 5,000 euros at an annual interest rate of 5%. He intends to return the amount received in 3 years. Applying the formula explained above the interest will therefore be 5,000 euros for 3 years for 5%, all divided by one hundred, that is 750 euros.

Please note that the indicated formula represents the calculation of simple interest , useful for understanding the amount of interest. This does not however correspond to the interest that will actually be paid. For a specific reference it is advisable to refer to the amortization plan provided with the personal loan, which indicates in detail the amount of the installment and makes it possible to calculate the interest that will actually be paid.
However, the calculation of interest on personal loans is essential to understand how effectively the loan will cost to those who request it.

Pay attention to the amortization plan

We have discussed the amortization plan in detail in the specific guide on the site. However, please note that depending on the plan applied, the method for calculating the interest rate and the periodic installment may also change. Usually in loans made in Italy the plan used is the French one, which provides for the payment of a constant installment for the duration of the loan and a plan of installments in which the principal and interest are inversely proportional. In fact the share of the two parts varies over time, with the portion of interest decreasing progressively, while the capital quota increases with the passing of time of the personal loan. This means in practice that the first installments correspond to the payment of the interest only, while the latter, simplifying, will be paid only for the return of the capital received. The form of the payment plan summarizes the reason why the calculation of simple interest does not exactly correspond to the interest that will actually be paid in the repayment period of the personal loan received.