The interest rate on a loan can be calculated primarily using two formulas:
- Simple Interest Formula:
A=P(1+rt)A=P(1+rt)A=P(1+rt)
where
- AAA = total repayment amount,
- PPP = principal amount,
- rrr = interest rate (as decimal),
- ttt = time duration of the loan.
The interest amount is A−PA-PA−P.
- Compound Interest Formula:
A=P(1+rn)ntA=P\left(1+\frac{r}{n}\right)^{nt}A=P(1+nr)nt
where
- nnn = number of compounding periods per year,
- other variables as above.
Again, interest is A−PA-PA−P. For example, with simple interest, a loan of $100,000 at 12% annual interest for 2 years would have interest:
100,000×0.12×2=24,000,100,000\times 0.12\times 2=24,000,100,000×0.12×2=24,000,
so total repayment is $124,000. In addition, EMI (Equated Monthly Installment) interest can be calculated using the EMI formula:
EMI=P×r(1+r)n(1+r)n−1EMI=P\times \frac{r(1+r)^n}{(1+r)^n-1}EMI=P×(1+r)n−1r(1+r)n
where
- rrr is the monthly interest rate,
- nnn is the loan tenure in months.
To calculate interest rate, use these formulas based on loan type (simple or compound) and known variables (principal, total repayment, duration, compounding frequency).
