Friday, August 25, 2017

How to Calculate Annual Interest Rate on a Loan

A loan refers to quick disbursal of money that one can take from banks to meet sudden expenses that may arise at any time. But before applying for a loan, it is important to calculate interest on loan using EMI calculator or spreadsheets.

calculate emi loan using free calculator


Banks follow different sets of laws when it comes to charging loan interests on different products. For example, credit cards charge daily interest while other products may require interest to be calculated monthly or even annually. Getting this detail is important because you need to use the right number for calculation. Generally, people prefer to do this little math on their own but some people rely on technology for quick calculations and thus use:

1.  Spreadsheets

Spreadsheets like Microsoft Excel and others are powerful tools that help you understand how the loan works by building a rough graph of your loan.

How to calculate annual interest rate in excel:

a)  Start with a blank worksheet

b)  Enter the Principal amount, Monthly payments, loan term in months, and Annual rate in cells B2 through B5, in order.

c)  Format cells C2 and C3 as currency with two decimal places.

d)  Format cell C5 as a percentage with two decimal places.

e)  Enter the following formula in cell C5: =12*RATE (C4, C3, and C2) to get the results.

Calculations here are automated so you can easily get important details about your loan. You can even use pre-built amortization templates to calculate the annual loan interest rate.

2. EMI Calculator

An EMI calculator does the same work. It will calculate loan interest rate per month, shows how much interest is in each payment and how much you’ll have to pay every month. For deeper analysis, you can copy and paste the output into a spreadsheet.

Apart from these two methods, the annual interest rate can be calculated manually as well. For a home loan, student loan and auto loan, the best way to do is to build an amortization table. It clearly shows every payment, loan interest, principal amount and your remaining loan balance at a given time. To calculate, you’ll have to provide the following basic information:

a.  The interest rate

b.  The loan period

c.  The principal amount you are paying interest on

d.  The monthly payment

For a quick estimate, a simple interest formula (Interest = Principle x rate x time) can help you find out the annual interest rate on a loan. For example, if you borrow home loan of 63 lakhs at 6% interest rate for a time period of say 30 years, then your monthly payment would be approximately Rs. 38,000/-.

Ideally, customers pay different amounts of interest every month – the amount usually reducing with each passing month. Reason being, your loan balance gets paid gradually and leads to lesser interest every month.

Listed below are some helpful steps to build an amortization table all by yourself:

1.  Start with calculating your monthly loan payment

2.  Convert the annual rate to the monthly rate by dividing it by 12

3.  Find out the monthly interest rate by multiplying the monthly rate by the loan balance at the start of the month.

4.  Deduct the interest cost by the monthly payment

5.  Reduce your loan balance by the principal amount

6.  Calculate your remaining loan balance

7.  Copy the outstanding loan balance to the next line

8.  Repeat steps 2 through 8 until the loan is paid off

The bottom line: Interest rate increases the price of the commodity (Car, property, equipment of your home or business, etc.) you buy on loan. Therefore it is wise to keep a track of it and make regular payments to decrease the interest amount with time. In some cases, these interest costs are tax deductible – which is one more reason not to ignore them. To understand your finances, you should calculate interest cost either before taking a loan or soon after borrowing. You can compare the interest rate of different loan schemes using Paisabazaar.com. It is an ideal platform wherein you can compare top loans from different banks, get best deals on credit cards and choose between longer and shorter loan terms by using its EMI calculator.
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