By Updated on January 31, 2019
A loan interest rate payable per year is a way of calculating monthly interest payments based on an annual interest rate. This works best with simple loans, where you pay the same amount of interest each month on the same amount of principal each month, rather than calculating regularly updated interest amounts on regularly updated principal balances. day.
The loan interest rate payable per annum is a method for calculating periodic interest payments based on an annual percentage rate. To calculate a monthly rate based on an annual rate, divide the annual rate by 12. If you take out a declining balance loan, your interest payments decrease over time.
Calculation of annual interest
- To calculate a monthly interest payment based on an annual interest rate, multiply the loan principal basis by the annual interest rate. For example, if your loan amount is $20,000 and you borrowed that amount at 3% interest, your interest payments total $600.
- Divide the annual interest amount by 12 to calculate the amount of your annual interest payment that is due each month. If you owe $600 for the year, you make monthly payments of $50.
- Another way to do the same calculation is to divide the annual interest rate by 12 to calculate the monthly rate. One-twelfth of 0.03 (3 percent) is 0.0025, and 0.0025 times $20,000 is $50, the same monthly payment you find using the previous method.
Declining balance or fixed rate interest calculations
Calculating an annual interest rate is simple if your loan is based on a fixed interest rate or a payment arrangement where interest is always calculated on the total loan amount rather than the outstanding principal . With a fixed interest rate on a $20,000 loan at 3%, you continue to pay the $50 in interest each month even though you have paid off your balance and no longer owe the full $20,000.
On the other hand, if your loan is based on a declining interest arrangement, the interest you owe each month is based on the principal you still owe while you continue to repay your loan. Declining balance loans are more advantageous than flat rate loans, and you may end up paying less interest with a declining balance loan even if your rate is higher because you will be paying that rate on an increasing amount. small over time.
Annual interest on declining balance loans
To calculate a monthly payment based on annual interest on a declining balance loan, multiply the monthly rate by the principal amount still owing. For example, if you repay $10,000 of your $20,000 loan at 3% interest after six months, your payments for the remaining six months of the year are calculated by multiplying the monthly rate of 0.0025 by the remaining balance of $10,000. Your monthly interest payment is $25.