# Interest Calculation

For those who are unaccustomed to interest calculations, we have prepared some examples to illustrate the various possibilities.

In order to make the examples more readable, we have constructed a simplified scenario. However, the policies are the same as those used by our office.

Suppose you lend \$10,000 to a friend, for one year, at 6%.

At the end of one year, you should receive:

• The \$10,000 you lent
• \$600 in interest.

The formula used to calculate interest is:

• The principal balance
• multiplied by the monthly interest rate
• multiplied by the number of months since interest was last paid.

The monthly interest rate is calculated as follows:

• The decimal equivalent of 6% is .06
• .06 divided by 12 equals .005

In the current case, interest is calculated as follows:

• \$10,000
• multiplied by .005
• multiplied by 12 months
• equals \$600

If the loan is repaid after 10 months, interest is calculated as follows:

• \$10,000
• multiplied by .005
• multiplied by 10 months
• equals \$500

Suppose your friend repays 1/2 of the loan early.

When a loan payment is made, the amount of interest due is always subtracted from the payment, before the remainder is applied to the principal balance.

If your friend wants to reduce the principal balance to \$5000, an additional \$500 in interest must be paid. The interest is calculated as follows:

• \$10,000
• multiplied by .005
• multiplied by 10 months
• equals \$500

After giving you a check for \$5,500, the principal balance on the loan is \$5,000.

If your friend wants to pay the loan in full 2 months later, \$5000 plus an additional \$50 in interest must be paid. The interest is calculated as follows:

• \$5,000
• multiplied by .005
• multiplied by 2 months
• equals \$50

By paying part of the loan early, your friend has paid a total of \$550 in interest.

Suppose the loan is for 3 years.

The number of months in this case would be 36 and interest is calculated as follows:

• \$10,000
• multiplied by .005
• multiplied by 36 months
• equals \$1800

Suppose your friend makes a partial payment.

If your friend is strapped for cash at the end of a year and only pays \$100, then the amount of interest not paid is called accrued interest. The calculation would be as follows:

• \$10,000
• multiplied by .005
• multiplied by 12 months
• equals \$600 interest due
• minus \$100 interest paid
• equals \$500 accrued interest

If your friend has enough money to pay everything one year later, then the interest calculation would be as follows:

• \$10,000
• multiplied by .005
• multiplied by 12 months
• equals \$600 interest due
• plus \$500 accrued interest
• equals \$1100

If your friend hands over a check for \$11,100, the loan will be paid in full.