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