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