How To Calculate Annual Interest Rates?

By on March 6th, 2017

Any loan is an important and complex issue. Choosing one is quite a challenge because conditions are different and require a lot of attention. Interest rates are one of the most significant problems.

Besides, there are different types of the loan interest rates. For example, rates of the principal loan matter but there are other major interest rates. By that, we mean annual interest rates on this loan, that you will have to repay. It is very crucial to consider while overviewing the options.

Calculating annual repayments lets to estimate, whether you will be able to stick to the certain payment schedule. Making a choice would be much easier. And there will be no surprise when the bill comes. So here you find installment loan tips.

The Tried-and-True Method

This method is one of the most accurate and reliable ways of calculating the annual loan. Here you will have to calculate the periodic payments on the loan.

Why Are the Periodic Payments Important

Lenders often demand a regular repayment, like once in a month or a quarter. Thus, it can be more useful to know an amount of the periodic payment rather than an annual.

Fortunately, there is a formula, which comes at help. Actually, it looks like a formula for the calculating an annual repayment. But with small tweaks, which are supposed to reflect a bigger number of the payments. If you need a comparison of a personal loan and a credit card loan, read this article.

This is the formula:

(r(P))/(1-(1+r)-n)

Here is a meaning of the letters:

R means interest rates for the period. Depending on the case, it may refer to the annual, monthly or quarterly payoff. It would be 24 for the monthly outpayments and 8 for the quarterly outpayments.

P is for the principal, in other words, a borrowed sum in overall.

Finally, N represents the number of periods on the loan. In most of the cases, it would equal years on the loan agreement. For the calculating periodic repayments, one thing has to be done. Divide the annual interest rates by a number of the payments within a year.

Let us make an example to make the counts. Let’s say, you take a \$12000 loan and have to repay 10% of the rates within two years. Then, the interest rate for the periodic repayment equals 0.10 to 12, what means 0.0083 or 83%. After that, fill in the formula with relevant numbers.

Here what it looks like:

(0.0083(\$12000))/(1-(1+0.0083)-24)

You’ve already made an evaluation of the interest rate for the periodic repayments. Next, solving an exercise is a key. First, define the numerator. To make it right, multiply the rates and the principal. Then streamline the denominator. Add 1 to the rate and solve exponent. Raise a result to the -24th power for this step.

Lastly, solve the denominator to the end. One more action is all you need. Monthly payment is your answer. Multiplying it by 12 months will give you a pretty accurate idea of the annual payment.

All these mathematical operations lead to the ultimate outcome. You get a periodic rate and possibility to make a thoughtful decision. If you need to confirm the number, turn to the online loan calculator. They make an equation based on the basic characteristics of the loan, such as loan amount, interest rates, compounding, a number of payments and payment frequency. All of this without a necessity of the calculating on your own. Please not, that credit score may affect the interest rate.

You may ask then, what is the reason for calculating an annual interest rate on the spreadsheet when anyone can do it online. Writing all details down is essential for noticing things. The approach makes for the better financial decisions on the loan.