Interest Calculations

Interest is calculated in a number of different ways. The four used by this plugin are: fixed, simple, compound and amortization.

Note: there are other ways of calculating interest and repayments. If the way you want to do it isn’t listed get in contact.

Variables Used

Principle = The amount you want to borrow

Interest = The percentage divided by 100. for example: 2% = 2/100

Term = the number of periods to which the Interest Rate applies. For example: 5 years or 28 days

Fixed Interest

This is the simplest one of all. The formula is:

Total to Pay = Principle x (1 + Interest)

For example: a loan of $100 with an interest rate of 5% returns:

$100 x (1 + 0.05) = $100 x 1.05 = $105

It doesn’t matter how long the loan is taken out for, the interest is always the same.

Try It Yourself:

£100  

  £1000

1 year  

  10 years

Monthly repayment is at interest

Total you will Pay:

Simple Interest

This interest calculation takes into account the time over which the loan is taken. The formula is:

Total to Pay = Principle x (1 + Interest x Term)

For example: a loan of $100 with an annual interest rate of 5% for 4 years returns:

$100 x (1 + 0.05 x 4) = $100 x 1.20 = $120

Try it yourself:

£100  

  £1000

1 year  

  10 years

Monthly repayment is at interest

Total you will Pay:

Compound Interest

This interest calculation uses the previous total to calculate the new total over the term of the loan.

Total to Pay = Principle x (1 + Interest)^Term

For example: a loan of $100 with an annual interest rate of 5% for 4 years returns:

$100 x (1 + 0.05)⁴ = $100 x 1.05⁴ = $121.55

Try it yourself:

£100  

  £1000

1 year  

  10 years

Monthly repayment is at interest

Total you will Pay:

Amortization

This is used to calculated repayments where the amount of interest reduces as the loan is repaid.

Payment = rate(Present Value) / 1 – (1 + rate)^{-number of periods}

This is further complicated by the difference between the USA and how the rest of the world calculate the rate. More about amortization repayments

Try it yourself (this example uses the US formula):

£100  

  £1000

1 year  

  10 years

Monthly repayment is at interest

Total you will Pay:

Repayments

To calculate the repayments on fixed, simple and compound interest all you have to do is divide the total to pay by the number of repayments.

So for example, a 4 year Loan repaid monthly would have 48 payments.

Amortization works differently. More about amortization repayments