When you borrow money, your monthly payment includes principal and interest.
Depending on your interest rate and loan amount, you may have to pay back hundreds or even thousands of dollars more than you originally borrowed. That’s why it’s so important to know how to calculate interest on a loan.
We created this guide to help you learn more about interest, including what it is, what types of interest a lender can charge and how to calculate interest on loan balances. Improve your financial situation by learning about how your interest rate affects the total cost of borrowing money.
Loan interest is the price you pay for borrowing money, much like a fee for the convenience of using someone else’s funds.
This enables lenders to earn income while assisting you in financing your needs, whether it’s purchasing a home, a car, or covering other expenses. Typically calculated as a small percentage of the total amount borrowed, the interest rate can either remain fixed or vary over time depending on the loan type.
Lenders employ two types of interest to earn money on borrowed amounts: simple interest and amortized interest. Let’s take a closer look at these two types, as well as differentiate between loan interest rates and APR.
Simple interest is interest calculated using only the principal amount of the loan. The interest rate never changes, so it’s easy to predict how much you’ll pay with each monthly payment. Lenders use simple interest for short-term personal loans and car loans.
Amortized interest means that when you make regular payments on a loan, part of the money goes toward paying off the amount you borrowed (called the principal), and the other part goes toward paying the interest charged on the loan.
As you make these payments, the amount of interest you pay decreases over time because the balance you owe (the principal) gets smaller. This process continues until you’ve paid off both the principal and the interest.
It’s commonly used in mortgage loans and other types of installment loans. It’s less common for short-term loans like payday loans.
While both are expressed as percentages, loan interest rate and annual percentage rate (APR) differ significantly.
Your interest rate represents the annual cost of borrowing money, focusing solely on interest charges and excluding origination fees and other costs.
On the other hand, APR encompasses the total yearly cost of borrowing, including interest, broker fees, points, and additional expenses. By factoring in these fees, APR provides a more precise estimate of the overall borrowing expenses.
Here’s how to calculate simple and amortized interest.
The formula to calculate simple interest on a loan is: SI = P × R × T, where P = Principal, R = Rate of interest, and T = Time in years.
For example, assume you have a loan with a $10,000 principal balance, a 10% interest rate and three-year term. Using the simple interest formula, you’d pay $3,000 in interest (10,000 x 0.10 x 3).
Try using our calculator below to see how much interest you would owe on a short-term loan.
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Important Note: The figures provided on this platform are meant for general information purposes only and should not be considered financial advice. We strongly encourage you to check with the specific financial institution for an accurate estimate before applying for any financial product.
Calculating amortized interest is a little more complicated.
Here’s how to determine how much interest you’ll pay over time:
For example, assume you have a $20,000 principal balance, an interest rate of 5% and a one-year repayment term.
Here’s an amortization schedule showing how much interest you’d pay:
| Payment due date | Payment amount | Principal | Interest | Balance |
|---|---|---|---|---|
| January 2025 | $1,712.15 | $1,628.82 | $83.33 | $18,371.18 |
| February 2025 | $1,712.15 | $1,635.60 | $76.55 | $16,735.58 |
| March 2025 | $1,712.15 | $1,642.42 | $69.73 | $15,093.16 |
| April 2025 | $1,712.15 | $1,649.26 | $62.89 | $13,443.90 |
| May 2025 | $1,712.15 | $1,656.13 | $56.02 | $11,787.77 |
| June 2025 | $1,712.15 | $1,663.03 | $49.12 | $10,124.73 |
| July 2025 | $1,712.15 | $1,669.96 | $42.19 | $8,454.77 |
| August 2025 | $1,712.15 | $1,676.92 | $35.23 | $6,777.85 |
| September 2025 | $1,712.15 | $1,683.91 | $28.24 | $5,093.94 |
| October 2025 | $1,712.15 | $1,690.92 | $21.22 | $3,403.02 |
| November 2025 | $1,712.15 | $1,697.97 | $14.18 | $1,705.05 |
| December 2025 | $1,712.15 | $1,705.05 | $7.10 | $0.00 |
Now all you have to do is add up the numbers in the interest column to determine the total amount of interest paid. In this scenario, you’d pay $545.80 in interest.
Several factors affect the interest rate on a loan:
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The table below shows the average interest rates for six types of loans.
| Loan type | Average interest rate (Credit Unions) | Average interest rate (Banks) |
|---|---|---|
| Home equity loan (5-year term; 80% equity) | 7.09% | 7.37% |
| Mortgage (15-year fixed rate) | 6.50% | 6.65% |
| Mortgage (30-year fixed rate) | 6.90% | 7.02% |
| New car loan (60-month term) | 6.40% | 7.21% |
| Unsecured loan (36-month term; fixed interest rate) | 10.83% | 11.65% |
| Used car loan (48-month term) | 6.27% | 7.13% |
This data comes from the National Credit Union Administration. Interest rates change frequently, so what you pay today may be different from what you see above. These averages were current as of July 2024.
Follow these guidelines to qualify for a lower interest rate on a loan.
If you have a low score, do everything you can to increase it. Depending on your situation, you may have to pay off some of your debt or wait a few months until a negative item “falls off” your credit report. A low credit score might result in being denied a loan, so improving it can also increase your chances of approval.
Don’t accept the first loan offer you get. Another lender may offer a lower rate, so shop around and compare terms to find the best personal loan for you.
If you set up automatic payments, your lender may offer a small discount on your interest rate. This reduces your total cost of borrowing.
As mentioned previously, longer terms come with higher interest rates. To qualify for a lower rate, try applying for a loan with a shorter term.
Your debt-to-income ratio compares how much debt you have with how much income you earn. If it’s high, you may not qualify for a loan with your preferred lender. Reduce your DTI by paying off some of your debt.
A co-applicant, also known as a co-borrower, is someone who agrees to repay the loan if you default on the payments. If you have a loved one with an excellent credit score, adding them as a cosigner may help you qualify for a better interest rate. Adding a co-applicant can also help you get approved for a loan if you have no credit history.
To calculate simple interest on a loan, use this formula: SI = P × R × T. In this formula, P = Principal, R = Rate of interest, and T = Time in years.
Interest rates fluctuate due to various factors, including the economy’s overall health, government policies, supply and demand for money (how many borrowers seek loans versus how many lenders provide them), loan terms and risk levels, and inflation rates.
Generally, no. Lenders charge different rates based on your creditworthiness. If your score is low, you’ll pay more for credit than you would if you had a high score. Prequalifying for a loan can help you understand what rates you might be offered based on your credit score.
Principal is the original amount of money borrowed, while interest is the cost of borrowing.
It’s better to pay off principal first. Lenders charge interest based on the amount of principal remaining, so paying the principal first can help you reduce the total amount of interest you pay.
Leigh Morgan is a seasoned personal finance contributor with over 15 years of experience writing on a diverse range of professional legal and financial topics. She specializes in subjects like navigating the complexities of insurance, savings, zero-based budgeting and emergency fund development.
In the last five years, she’s authored over 300 articles for credit unions, digital banks, and financial professionals. Morgan is also the author of “77 Tips for Preventing Elder Financial Abuse,” a book focused on helping caregivers protect the elderly from financial scams.
In addition to her writing skills, she brings real-world financial acumen thanks to her previous experience managing rental properties as part of a $34 million real estate portfolio.
Blake Esken has over 15 years of experience in product management and has been a member of the Los Angeles Times staff for over five years.
As part of his role at the Los Angeles Times Commerce Team, Blake acts as the in-house reviewer and fact checker for LA Times Compare. He supervises all content for compliance and accuracy and puts to use skills he has honed through years of experience managing high-stakes projects for a range of industry-leading companies.
He has a strong background in data analysis, compliance, and communication, which allows him to support LA Times Compare through fact-checking in an effort to provide up-to-date and factual information across our content.
