How To Calculate Your Monthly Interest

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How to calculate your monthly interest

It’s different calculations depending on the loan you have. The interest on a loan is calculated by multiplying the loan balance with the annual interest rate and the number of days since the last payment divided by the number of days in the year. Loan payments are applied first to interest, second to principal.

Interest continues to accrue during periods of nonpayment, and can cause the loan balance to grow significantly during an extended period of nonpayment. In particular, interest continues to be charged when a borrower is late with a payment or stops repaying the loan.

If a payment is received late, more interest will have accrued, so less of the payment will be applied to the principal balance of the loan.

Interest is charged from the date the loan is disbursed. For example, a significant amount of interest may accrue on a student loan while the student is enrolled in college. Since payments are applied first to interest, the borrower’s loan payments must first pay off the accumulated interest balance before there will be any progress in paying down the principal balance of the loan.

The sum of the principal balance and the accrued but unpaid interest will exceed the original amount borrowed until the accumulated interest has been paid off. To measure progress in paying off a debt, compare the current loan balance (sum of the principal and interest balances) with the loan balance when the loan entered repayment.

Then there are Fixed and Variable interest rates. A fixed interest rate is the same for the life of the loan. This yields the same loan payment every month in the standard or extended repayment plans, both of which are level repayment plans.

A variable interest rate may change throughout the life of the loan, yielding a different loan payment every time the interest rate changes. The interest rate when the loan enters repayment may be much different than the interest rate when the borrower first obtained the loan.

 

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