| Having some knowledge of how to calculate
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| | to be paid back equals the principal
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| finance charges is always a good thing.
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| | borrowed plus the interest charge:
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| Most lenders, as you know, will do this
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| | Total repayments = principal + interest
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| for you, but it can helpful to be able to
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| | Usually the money is paid back in regular
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| check the math yourself. It is important,
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| | installments, either monthly or weekly.
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| however, to understand that what is
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| | To calculate the regular payment amount,
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| presented here is a basic procedure for
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| | you divide the total amount to be repaid
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| calculating finance charges and your
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| | by the number of months (or weeks) of the
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| lender may be using a more complicated
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| | loan.
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| method. There may also be other issues
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| | To convert the loan period, 'T', from
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| attached with your loan which may affect
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| | years to months, you multiply it by 12.
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| the charges.
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| | To convert 'T' to weeks, you multiply by
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| The first thing to understand is that
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| | 52, since there are 52 weeks in a year.
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| there are two basic parts to a loan. The
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| | Here is an example problem to illustrate
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| first issue is called the principal. This
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| | how this works.
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| is the amount of money that is borrowed.
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| | Example:
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| The lender wants to make a profit for his
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| | A single mother purchases a used car by
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| services (lending you the money) and this
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| | obtaining a simple interest loan. The car
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| is called interest. There are many types
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| | costs $1500, and the interest rate that
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| of interest from simple to variable. This
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| | she is being charged on the loan is 12%.
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| article will examine simple interest
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| | The car loan is to be paid back in weekly
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| calculations.
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| | installments over a period of 2 years.
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| In simple interest deals, the amount of
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| | Here is how you answer these questions:
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| the interest (expressed as a percentage)
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| | 1. What is the amount of interest paid
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| does not change over the life of the
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| | over the 2 years?
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| loan. This is often called flat rate or
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| | 2. What is the total amount to be paid
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| fixed interest.
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| | back?
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| The simple interest formula is as
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| | 3. What is the weekly payment amount?
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| follows:
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| | You were given: principal: 'P' = $1500,
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| Interest = Principal × Rate ×
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| | interest rate: 'R' = 12% = 0.12,
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| Time
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| | repayment time: 'T' = 2 years.
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| Interest is the total amount of interest
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| | Step 1: Find the amount of interest paid.
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| paid.
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| | Interest: 'I' = PRT
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| Principal is the amount lent or borrowed.
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| | = 1500 × 0.12 × 2
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| Rate is the percentage of the principal
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| | = $360
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| charged as interest each year.
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| | Step 2: Find the total amount to be paid
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| To do your math, the rate must be
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| | back.
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| expressed as a decimal, so percentages
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| | Total repayments = principal + interest
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| must be divided by 100. For example, if
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| | = $1500 + $360
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| the rate is 18%, then use 18/100 or 0.18
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| | = $1860
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| in the formula.
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| | Step 3: Calculate the weekly payment
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| Time is the time in years of the loan.
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| | amount.
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| The simple interest formula is often
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| | Weekly payment amount = total repayments
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| abbreviated:
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| | divided by loan period, T, in weeks. In
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| I = P R T
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| | this case, $1860 divided by 104 weeks
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| Simple interest math problems can be used
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| | equals $17.88 per week.
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| for borrowing or for lending. The same
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| | Calculating simple finance charges is
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| formulas are used in both cases.
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| | easy once you have done some practice
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| When money is borrowed, the total amount
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| | with the formulas.
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