Loan Interest Calculator

How Loan Interest is Calculated

Loan interest is the cost charged by lenders for borrowing money over a specified period. The total interest paid depends on three key factors: the initial principal loan amount, the interest rate, and the loan term length.

Simple Interest vs. Amortized Compound Interest

For simple interest loans, the interest charge is calculated using the formula:

$$\text{Total Interest} = P \times r \times t$$

Where $P$ is the principal, $r$ is the annual interest rate, and $t$ is time in years.

For standard amortized loans (such as mortgages, auto loans, and personal loans), interest compounds monthly based on the declining principal balance:

$$M = P \frac{r/12 (1 + r/12)^n}{(1 + r/12)^n - 1}$$

Ways to Lower Total Loan Interest

To minimize the total interest paid over the life of a loan:

• Secure a lower interest rate or refinance when rates drop.
• Choose a shorter loan term to reduce duration.
• Make extra principal payments regularly.