Simple interest calculation

Regardless of the fact that in Medieval Ages charging for interest was not well looked upon to say the least, in nowadays interest is something we all agree that makes sense. Moreover, it makes sense in the form that you are giving or you are given the ability to use someone else’s asset (whether its money, car or something else). From such activities interest is considered to be as compensation to the lender as he or she could have done something else with the asset, but instead it was given for you to use. As it is reasonable to believe that assets should always earn income or give value, giving it to someone else for use is just another means of an asset generating income really.

Interests can be calculated with simpler and more complicated formulas. It all depends on the borrowing type, additional charges paid alongside with the agreement, interest rates varying or having different components etc. While we will cover all those types in our future posts, at the moment we are concentrating on the simple version of interest calculation.

Normally interest is charged only on portion of the principal amount that is unpaid at certain date in time. Since usually the interest rates are determined as ‘per annum’, the calculation is as follows: to find out the interest charge for the whole year (12 months) you simply multiply the rate with the portion of unpaid principal. However, essentially one thing must be considered here – the scheduled payments of the principal. If they are done monthly, the calculation is as follows: at the end of each month you multiply the interest rate with the unpaid portion and divide this by 12 (since the interest rate is meant for 12 months usage).

It’s really this simple, but don’t forget that this is considered as ‘simple interest rate’ and there are quite a few factors that need to be considered if things get a bit more complicated. However, if you like to keep things as simple as possible, this method is the way to go in terms or loans given or received.