How To Calculate Loan Interest – Bankrate

  • April 8, 2021
  • By: Greenpath Financial Wellness

Planning to borrow money?  Bankrate asked GreenPath to weigh in on what you need to know about interest.

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The lender will ask you to repay those funds over time. But banks expect to be paid something for their services and the risk they take when lending you money. That means you won’t just pay back the money you borrowed. You’ll pay back the loan plus an additional sum, known as interest.

Interest is one of the primary ways that lenders, banks and credit card issuers earn a profit. Here’s a look at how interest works and how you can calculate the cost of borrowing money.

Factors that can affect how much interest you pay

There are many factors that can affect how much interest you pay for financing. Here are some of the primary variables that can impact how much you will pay over the life of the loan.

Loan amount

The amount of money you borrow (your principal loan amount) has a big influence on how much interest you pay to a lender. The more money you borrow, the more interest you’ll pay.

“For larger loans, the lender is assuming greater risk. Hence, the lender seeks a higher return,” says Jeff Arevalo, financial wellness expert for GreenPath Financial Wellness.

If you borrow $20,000 over five years with a 5 percent interest rate, you’ll pay $2,645.48 in interest on an amortized schedule. If you keep all other loan factors the same (e.g., rate, term and interest type) but increase your loan amount to $30,000, the interest you pay over five years would increase to $3,968.22.

Takeaway: Don’t borrow more than you need to. Crunch the numbers first and determine exactly how money you really require.

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Jeff Arevalo

Jeff Arevalo is a Financial Wellness Expert and has been with the Greenpath since 2006. He possesses a strong passion for helping others and takes great pride in providing strong financial education and effective money management tools to help make a difference in people’s lives. Jeff and his wife recently welcomed a baby boy to their family and are excited to navigate the world of parenthood for the first time.