Interest Calculator

Major purchases are not always possible using available cash on hand.  Cars, homes, college education, and other big-ticket items reach beyond our resources, requiring creative financing options to close the sales.  When savings and income do not cover the cost of purchases, consumers turn to various credit products to bridge the affordability gap.  The borrowing methods used are chosen specifically for the purchases they fund.  Credit cards, for example, are designed for short-term debt purchases, which will be paid back relatively quickly.  Other credit vehicles are better suited for purchases requiring many years to pay-off.  Homes and cars, for example, have their own brands of financing, dedicated to just such purchases.

Lenders operate for-profit, so the trade off for consumers seeking funding comes around as interest.  Based on the amount borrowed, length of repayment term, and other economic conditions, various interest amounts are applied to each loan assumed.  Over the course of repayment, interest installments are tacked-on to regular principal payments, until the entire loan balance is wiped away.

Interest Calculations for Various Loans

Credit is issued in a variety of ways, so interest and repayment have unique conditions attached, depending on where and why you borrow.  To help consumers compare loans, and keep lenders on the up and up, credit offers use common terminology to express the interest rates attached to loans.  APR, annual percentage rate, is a figured representing the total interest percentage paid over the course of the year.

Interest amounts for each payment are tabulated using formulas derived from the APR.  Daily periodic rate, for example, is a figure used to determine interest amounts.  The number represents the annual percentage rate (APR) divided by the number of days in the year: 365.  Some credit card companies use 360 days to arrive at DPR.  Once calculated, daily periodic rate is multiplied by the amount owed at the end of each day.  The interest is added to the total balance and becomes part of the next day's debt total, and so forth.

Types of Credit

The types of credit available each lend themselves to particular financing needs.  Revolving credit, for example, is most clearly demonstrated by its most common consumer application: Credit cards.  Short-term loans are made by creditors, who issue cards to acknowledge membership. Then, purchases are made without cash exchanging hands, before being posted to cardholder accounts.  From the time they are added to revolving accounts, until they are fully paid-for, purchases follow an interest timeline agreed upon by all involved parties.

Initially, expenditures are covered by complimentary grace periods, during which no interest is applied.  After that, interest is compounded according to your loan agreement or cardholder terms.  Further analysis separates principal amounts from payment portions dedicated only to interest, providing a snapshot of how your monthly revolving debt payments are applied.

Installment credit payments are structured to be the same each month, but the way the principal of most mortgages and other installment loans is amortized, the portion of the payment applied to interest varies over the course of a loan term.  Interest calculator uses two essential variables: Amount borrowed and interest rate, to illustrate monthly interest payments for particular loans.