Determining Interest

• 1). Consult your loan information, whether that be a current statement from your lender or the original paperwork that you received after submitting your application. The documents should state whether the interest is accrued annually (in which case, use the formula from Step 2 - "simple interest") or is compounded annually (skip to Step 3 and use the formula for "compound interest").
  
  
• 2). If you want to know how much interest you owe currently, follow these steps:
  
  Step 1: Principal (original amount of borrowed money) x Annual Interest Rate x Time Outstanding (since you first borrowed the money) = Interest Gained
  Step 2: Add interest gained to principal to determine current amount owed.
  
  Example: $1,000 for 1 year at 5% interest. It has been 6 months.
  
  1000 x .05 x 6/12 = $25
  $1,000 + $25 = $1,025
  
  Amount Owed is $1,025.
  
  
• 3). To determine how much money you will owe at the end of your entire loan period, follow this equation for calculating simple interest:
  
  Step 1: Principal x Interest Rate = Interest Earned
  Step 2: Interest Earned x Loan Period = Total Interest for Loan Period
  Step 3: Principal + Interest = Total Amount Owed
  
  Example: $1,000 at 5% interest per year for 10 years.
  1000 x .05 = 50
  50 x 10 = 500
  1000 + 500 = $1,500
  
  Amount owed is $1,500.
  
  
• 4). To determine how much money you will owe at the end of your entire loan period, follow this equation for calculating compound interest:
  
  Step 1: Principal x Interest Rate = Interest Earned
  Step 2: Interest Earned + Principal = New Principal Balance
  Step 3: Repeat with new principal balance each time.
  
  Example: $1,000 at 5% interest for 3 years.
  
  Year 1
  1000 x .05 = 50
  50 + 1000 = 1050 (new principal balance)
  
  Year 2
  1050 x .05 = 52.50
  52.50 + 1050.00 = 1,102.50 (new principal balance)
  
  Year 3 - Final Year
  1102.50 x .05 = 55.13
  55.13 + 1102.50 = $1,157.63
  
  Amount owed is $1,157. 63