Difference between revisions of "Calculate Interest Payments"
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#*'''Interest:''' In simple terms, the percentage of money you're being charged to have the loan. It is either given as a percentage (such as 4%) or a decimal (.04). | #*'''Interest:''' In simple terms, the percentage of money you're being charged to have the loan. It is either given as a percentage (such as 4%) or a decimal (.04). | ||
#*'''Term:''' Usually in months, this is how long you have to pay the loan off. For mortgages it is often calculated in years. | #*'''Term:''' Usually in months, this is how long you have to pay the loan off. For mortgages it is often calculated in years. | ||
| − | #*'''Payment Option:''' Almost always a "fixed-term loan." However this can be different for specialty loans. Ask if the interest and payment schedule is fixed before getting a loan if you are unsure.<ref>http://www.interest.com/home-equity/calculators/monthly-payment-calculator/</ref> | + | #*'''Payment Option:''' Almost always a "fixed-term loan." However this can be different for specialty loans. Ask if the interest and payment schedule is fixed before getting a loan if you are unsure.<ref name="rf1">http://www.interest.com/home-equity/calculators/monthly-payment-calculator/</ref> |
| − | #Find out your interest rate before getting a loan. The interest rate is the cost you pay for borrowing money. It is the rate of interest that you will pay on the principal for the life of the loan. You want it to be as low as possible, as even .5% of a difference can mean a huge sum of money.<ref>http://www.investopedia.com/terms/i/interestrate.asp</ref> If you would prefer lower payments, you may pay a higher interest rate and more total interest over the loan, but less each month. Someone with less savings on hand or whose income is bonus or commission-based would likely prefer this option. However, want to stay below 10% interest whenever possible. The common rates for different loans are: | + | #Find out your interest rate before getting a loan. The interest rate is the cost you pay for borrowing money. It is the rate of interest that you will pay on the principal for the life of the loan. You want it to be as low as possible, as even .5% of a difference can mean a huge sum of money.<ref name="rf2">http://www.investopedia.com/terms/i/interestrate.asp</ref> If you would prefer lower payments, you may pay a higher interest rate and more total interest over the loan, but less each month. Someone with less savings on hand or whose income is bonus or commission-based would likely prefer this option. However, want to stay below 10% interest whenever possible. The common rates for different loans are: |
| − | #*'''Auto:''' 4-7% <ref>http://www.bankrate.com/finance/auto/current-interest-rates.aspx</ref> | + | #*'''Auto:''' 4-7% <ref name="rf3">http://www.bankrate.com/finance/auto/current-interest-rates.aspx</ref> |
#*'''Home:''' 3-6% | #*'''Home:''' 3-6% | ||
#*'''Personal Loans:''' 5-9% | #*'''Personal Loans:''' 5-9% | ||
#*'''Credit Cards:''' 18-22% This is why you should avoid large purchases you can't repay quickly on credit cards. | #*'''Credit Cards:''' 18-22% This is why you should avoid large purchases you can't repay quickly on credit cards. | ||
| − | #*'''Payday Loans:''' 350-500% These loans are very dangerous if you can't pay them off within 1-2 weeks.<ref>http://econlib.org/library/Enc/InterestRates.html</ref> | + | #*'''Payday Loans:''' 350-500% These loans are very dangerous if you can't pay them off within 1-2 weeks.<ref name="rf4">http://econlib.org/library/Enc/InterestRates.html</ref> |
| − | #Ask about accrual rates to determine when you get charged interest. In technical terms, the accrual rate tells you how often lender calculates the interest you owe. The more frequently you're charged the more you owe, since you have less time to pay off and the bill and prevent higher interest.<ref>http://www.investopedia.com/terms/a/accrual-rate.asp</ref> Look, for example, at a $100,000 loan with 4% interest, compounded three different ways: | + | #Ask about accrual rates to determine when you get charged interest. In technical terms, the accrual rate tells you how often lender calculates the interest you owe. The more frequently you're charged the more you owe, since you have less time to pay off and the bill and prevent higher interest.<ref name="rf5">http://www.investopedia.com/terms/a/accrual-rate.asp</ref> Look, for example, at a $100,000 loan with 4% interest, compounded three different ways: |
#*'''Yearly:''' $110,412.17 | #*'''Yearly:''' $110,412.17 | ||
#*'''Monthly:''' $110,512.24 | #*'''Monthly:''' $110,512.24 | ||
#*'''Daily:''' $110,521.28 | #*'''Daily:''' $110,521.28 | ||
| − | #Use longer term loans to pay less each month, but more overall. The term is the period of time that you have to repay the loan.<ref>http://www.investopedia.com/terms/t/term.asp</ref> Again, this will vary from one loan to the next, and you'll need to choose a loan with a term that meets your needs. A longer term will typically result in more interest paid over the life the loan, but smaller monthly payments.<ref | + | #Use longer term loans to pay less each month, but more overall. The term is the period of time that you have to repay the loan.<ref name="rf6">http://www.investopedia.com/terms/t/term.asp</ref> Again, this will vary from one loan to the next, and you'll need to choose a loan with a term that meets your needs. A longer term will typically result in more interest paid over the life the loan, but smaller monthly payments.<ref name="rf4" /> For example, say you have a $20,000 auto loan with 5% interest. Total payment would be: |
#*'''24 Month Term:''' You pay $1,058.27 in total interest, but only $877.43 each month. | #*'''24 Month Term:''' You pay $1,058.27 in total interest, but only $877.43 each month. | ||
#*'''30 Month Term:''' You pay $1,317.63 in total interest, but only $710.59 each month. | #*'''30 Month Term:''' You pay $1,317.63 in total interest, but only $710.59 each month. | ||
| − | #*'''36 Month Term:''' You pay $1,579.02 in total interest, but only $599.42 each month.<ref | + | #*'''36 Month Term:''' You pay $1,579.02 in total interest, but only $599.42 each month.<ref name="rf1" /> |
===Calculating your Payment by Hand=== | ===Calculating your Payment by Hand=== | ||
| − | #Learn the formula for complex interest payments. Calculating your payments and interest requires the use of a mathematical formula, which is as follows: <math> Payment = Principal * \frac{i(1+i)^n}{(1+ i)^n - 1}</math><ref>http://www.fonerbooks.com/interest.htm</ref> | + | #Learn the formula for complex interest payments. Calculating your payments and interest requires the use of a mathematical formula, which is as follows: <math> Payment = Principal * \frac{i(1+i)^n}{(1+ i)^n - 1}</math><ref name="rf7">http://www.fonerbooks.com/interest.htm</ref> |
#*The "i" represents interest rate, and the "n" represents the number of payments. | #*The "i" represents interest rate, and the "n" represents the number of payments. | ||
#*Like most equations in finance, the formula for determining your payment is much more intimidating than the math itself. Once you understand how to set up the numbers, calculating your monthly payment is as easy as pie. | #*Like most equations in finance, the formula for determining your payment is much more intimidating than the math itself. Once you understand how to set up the numbers, calculating your monthly payment is as easy as pie. | ||
#Adjust for frequency of payments. Before you plug numbers into the equation, you must adjust your interest payment “i” for how often you are paying. | #Adjust for frequency of payments. Before you plug numbers into the equation, you must adjust your interest payment “i” for how often you are paying. | ||
#*For example, imagine you took out a loan at 4.5 percent, and the loan required you to make payments on a monthly basis. | #*For example, imagine you took out a loan at 4.5 percent, and the loan required you to make payments on a monthly basis. | ||
| − | #*Since your payments are monthly, you will need to divide the interest rate by 12. 4.5 percent (.045) divided by 12 equals 0.00375. Plug this number in for "i."<ref | + | #*Since your payments are monthly, you will need to divide the interest rate by 12. 4.5 percent (.045) divided by 12 equals 0.00375. Plug this number in for "i."<ref name="rf7" /> |
#Adjust for number of payments. To determine what to plug in for "n," your next step is to determine the total number of payments you'll be making over the term of the loan. | #Adjust for number of payments. To determine what to plug in for "n," your next step is to determine the total number of payments you'll be making over the term of the loan. | ||
| − | #*Imagine that your monthly payments are on a loan with a 30 year term. To find the number of payments, simply multiply 30 by 12. You'll be making 360 payments.<ref | + | #*Imagine that your monthly payments are on a loan with a 30 year term. To find the number of payments, simply multiply 30 by 12. You'll be making 360 payments.<ref name="rf7" /> |
#Calculate your monthly payment. To figure your monthly payment on this loan, it is now just a matter of plugging the numbers into the formula.This might look intimidating, but if you go step by step, you'll soon have your interest payment. Below are the steps of the calculation, done one by one. | #Calculate your monthly payment. To figure your monthly payment on this loan, it is now just a matter of plugging the numbers into the formula.This might look intimidating, but if you go step by step, you'll soon have your interest payment. Below are the steps of the calculation, done one by one. | ||
#*Continuing with the example above, imagine you have borrowed $100,000. Your equation will look like this: <math>100,000 * \frac{0.00375 (1 + 0.00375)^360}{(1 + 0.00375)^360 - 1}</math> | #*Continuing with the example above, imagine you have borrowed $100,000. Your equation will look like this: <math>100,000 * \frac{0.00375 (1 + 0.00375)^360}{(1 + 0.00375)^360 - 1}</math> | ||
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#*<math>100,000 * 0.00506685..... = 506.69</math> | #*<math>100,000 * 0.00506685..... = 506.69</math> | ||
#*'''$506.69.''' This will be your monthly payment. | #*'''$506.69.''' This will be your monthly payment. | ||
| − | #Calculate your total interest. Now that you have the monthly payment, you can determine how much interest you will pay over the life of the loan. Multiply the number of payments over the life of the loan by your monthly payment. Then subtract the principal amount you borrowed.<ref | + | #Calculate your total interest. Now that you have the monthly payment, you can determine how much interest you will pay over the life of the loan. Multiply the number of payments over the life of the loan by your monthly payment. Then subtract the principal amount you borrowed.<ref name="rf7" /> |
#*Using the example above, you'd multiply $506.69 by 360 and get '''$182,408.''' This is the total amount you'll pay over the loan's term. | #*Using the example above, you'd multiply $506.69 by 360 and get '''$182,408.''' This is the total amount you'll pay over the loan's term. | ||
#*Subtract $100,000 and you end up with '''$82,408'''. That is the total amount of interest you'd pay on this loan. | #*Subtract $100,000 and you end up with '''$82,408'''. That is the total amount of interest you'd pay on this loan. | ||
