What is The Formula For Calculating Interest Rate On A Loan?
It is one thing to take a loan, it is another thing to understand the terms and conditions of your lender and how the loan granted policy works. In previous articles, we have written that you should not neglect reading the terms of your lender before taking the loan, because many times we tend to agree with whatever pop-up on our screen during the loan application period.
After requesting a loan and getting it from the lender, you might want to know how to calculate the interest rate of the loan taken. Hence, this article is for you if you want to know the formula for calculating the interest rate on a loan.
What Is Loan Interest?
When it comes to business, no one is a philanthropist. The main aim of every company that is in for business is to make a profit, as that is the reward of capital.
Before taking a loan anywhere, you must have been on a mutual agreement with the lender that you are paying back with certain rates (amounts) added to the original amount of money taken. This is simply the concept of loan interest.
The loan interest of every loan-giving company defers… While some might want to charge you N2,000 on every 10,000 loans taken, other companies may go with you for as low as N500.
Factors Used In Measuring Loan Interest
There are basically two factors all companies consider to bring out their loan interest policy. Let us quickly examine these parameters:
- Time/Loan duration – If the company allows you to change the number of days, weeks, or even months for which you want to pay back your loan, then it will be clear to you that all company works with this.
For instance, when out of; 2 weeks, 2 months, or 4 months for which you could return a N10,000 loan, you chose 2 months, you can be sure the loan interest rate attached to the money taken will not be as much as that of the 4 moons time duration and it will definitely be more than what you would be asked to return going for the 2 weeks.
- Amount Granted – Another significant factor affecting loan interest rate is the amount you are given, I think everyone should understand this because it is simple logic, you cannot be required to return N15,000 for instance, when you take a N2,000 loan.
Hence, you should bear in mind that your loan interest rate is calculated based on these two parameters.
The factors alongside the principal loan taken are what is the formula used in the calculation of the interest rate of a loan.
The Formula For Calculating Interest Rate On A Loan
There are many Formula For Calculating Interest Rate On A Loan, but we’re going to use a simple formula for easy understanding.
For example, if you take a 3-year loan for N10,000 and the interest rate on the loan is said to be 5 percent, you should use the formula below in solving for your interest:
N10,000 x .05 x 3 = N1,500
That is simply how to calculate your simple interest rate.
Just like you might have been taught in school, the formula for calculating the interest rate on a loan is not hard, all the elements you need to bring together are: The real amount borrowed (principal loan), Interest Rate, and The Loan duration (which is the time for which your loan is said to take before it is due)
Multiply all three elements and that would be equal your interest.
Disclaimer: This is as obtained from several accredited sources on the internet.
Consequences Of Not Paying Your Loan Back On Time
We must admit that we cannot talk about loan interest without having to include in our piece some of the consequences of not paying back your loan on time.
Having learned how the interest rate on a loan increases, and a few other things, you might be interested in knowing what the consequences of not paying your loan back on time mean.
Firstly, it results in a financial deficiency referred to as ‘Bad credit.’
Bad credit is a term used in financial companies to simply denote that one has not been doing well with previous loans. If you have taken some loans in the past and refuse to pay back when it is due, or you paid late, you might begin to get the ‘Bad credit’ report from other platforms you may wish to take loans from.
That isn’t all, when you are a victim of a bad credit loan report, you are open to facing:
Low loans opportunity – When the company you want to take new loans from discovers you haven’t done well on previous platforms, you may not be offered a high loan opportunity.
You might in some cases, be completely denied a loan – not all lenders will be so tolerant as to give you a loan when you don’t appear to have a good record as regards your previous loans taken.
You might be denied employment – some companies won’t employ people that haven’t done well with loans taken in the past, as that will apparently portray you as an untrustworthy or unfaithful individual that may harm the company, or simply not be able to contribute to the growth of the organization.
If the loan you failed to pay back was taken online, you could be punished in many ways, such as issues with your BVN. Sometimes, some online loan lenders might go to the extent of taking back their money themselves whenever they got notified you have money in the affected bank account.
On the other hand, if the loan taken is through a face-to-face medium, you might get arrested and face some kind of embarrassment you never thought of.
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In conclusion, loan interest rate calculation, despite the parameters we have given above, depends majorly on the company you are taking a loan from. You are advised to go through the interest rate of several loan platforms and compare if you don’t want to face a victim of high loan interest rate platforms.
We wish you well, as you emerge to take a new loan. You might also want to check out a few other articles on our website – don’t hesitate to do that if you want to know more about loan taking.