Use a Simple Interest Calculator to Find Your Payment Amount
Even "simple" interest rates can be confusing. This article will help you understand how a simple interest rate factors into your purchase as well as calculate your average payment.
Contents
Steps
Using a Basic Calculator
- Understand the variables of your payment plan. To calculate your payment amount you will need to know the interest rate, the principal amount and how long you will be making payments.
- Interest rate. The rate of your simple interest payment plan will most likely be communicated with a number in percentage form. This percentage reflects the amount of money extra you will be paying given a certain amount of time. Usually the rate is annual - for example if your rate is 15%, the extra amount will be 15% of the principal for every year that you have an outstanding balance.
- Principal amount. This amount reflects your outstanding balance. For instance, if you bought a computer that costs $2,000 and paid $1000 upfront, you would then have a principal amount of $1,000 left to pay.
- Time period of payment plan. This is the amount of time between your first and last payment. The longer the period is, the higher the total amount you paid for your purchase will be.
- Calculate your total accrued interest. You need to find out much extra is going to be added to your outstanding balance.
- Identify your your variables. What is the rate, the principal and time period of your payment plan?
- Be sure to convert your rate into a decimal amount. To do this you need to divide the number in the percentage by 100. For example, if your rate is 15%, divide 15 by 100 - you will get .15, the rate in decimal form.
- Consider the period of your payment plan versus the period specified by your interest rate. Does the period of your payment plan fit evenly into the period specified by the rate? If not, you will need to divide your interest rate before you do any further calculation with it. Imagine the case where you will only be making payments for 7 months but the rate is given per annum. You will probably need to divide the annual interest rate by 12 in order to generate a monthly interest rate.
- Multiply your rate in decimal form by the principal (rate x principal). This tells you how much interest will accrue per period. For example, if the principal is $1000 and the annual interest rate is 15% (.15), then you will be paying $150 per year in interest. If the principal is $1000 and your monthly rate is 3% (.03), then you will have to paying $30 per month in interest.
- Multiply the amount of interest per period by the number of time periods you expect it will take you to complete your payment (interest accrued per period x periods). This will give you your total accrued interest. Say you know that you'll be paying $150 per year in interest and you will be paying off your purchase for 3 years – by multiplying these numbers ($150 x 3) you would find that your total accrued interest is $450.
- Calculate the total cost of your purchase. Add your total accrued interest to your principal amount (interest + principle). If you found that your total accrued interest is $450 and the corresponding principal amount is $1000, by adding these two figures you'll find that the total cost of your purchase is $1450.
- Calculate your average payment amount.
- Consider how often you will be making your payment compared with the period in which you are accruing interest. Say the period in which you accrue interest is 3 years - if you are making monthly payments, there will be 36 of them; if you are making semiannual payments you will be 6 payments.
- Divide the total cost of your purchase by the amount of payments you will make.
Using an Online Simple Interest Calculator
- Find a simple interest calculator online.
- Try this simple interest calculator.
- Focus on the loan payment section.
- Enter the loan amount.
- Enter the annual interest rate.
- Enter the payment term in months.
- Click outside the number boxes.
- Read the loan payment amount.
Tips
- If there are upfront costs required to get the loan (such as points) you should subtract them from the loan amount. This is because the value of the loan to you is reduced by its costs.
