Having some knowledge of how to calculate finance charges is always a good thing. Most lenders, as you know, do it for you, but it can help to verify the same math. It is important, however, to understand that what is presented here is a basic procedure for calculating finance charges and your lender may be using a more complicated method. There may also be other problems associated with the loan that may affect the charges.

The first thing to understand is that there are two basic parts of a loan. The first number is called the director. This is the amount of money you borrow. The lender wants to make a profit for their services (pay money) and this is called interest. There are many types of interest from the simple to the variable. This article will examine simple interest calculations.

Simple interest in operations, the amount of interest (percentage) does not change during the life of the loan. This is often called flat-rate or fixed rate.

The simple interest formula is:

Interest = principal × rate × time

Interest is the total amount of interest paid.

The capital is the amount borrowed or loaned.

The rate is the percentage of principal and interest charges each year.

To make your calculations, the rate must be expressed as a decimal, so the percentages should be divided by 100. For example, if the rate is 18%, then use 18 / 100 or 0.18 in the formula.

Time is the time in years the loan.

The simple interest formula is often abbreviated:

I = PRT

Simple mathematical problems of interest can be used for loans or loan. The formulas use the same in both cases.

When money is borrowed, the total amount to pay back borrowed capital is equal to, plus the interest charge:

Total repayments = principal + interest

Usually, the money is paid in installments, either monthly or weekly. To calculate the regular payment amount, you divide the total amount to be paid by the number of months (or weeks) of the loan.

To convert the loan period, “T”, from years to months, is multiplied by 12. To convert to ‘T’ or weeks, multiply by 52, since there are 52 weeks in a year.

Here is an example problem to illustrate how this works.

Example:

A single mother buy a used car by obtaining a simple interest loan. The car costs $ 1500, and the rate of interest charged on the loan is 12%. The car loan should be repaid in weekly installments over a period of 2 years. Here is how to answer these questions:

1. What is the amount of interest paid during the 2 years?

2. What is the total amount to pay again?

3. What is the weekly payment amount?

They gave: key: ‘P’ = $ 1500, the interest rate ‘R’ = 12% = 0.12, the payback time, ‘T’ = 2 years.

Step 1: Find the amount of interest paid.

Interest: ‘I’ PRT =

= 1500 × 0.12 × 2

= $ 360

Step 2: Find the total amount to pay again.

Total repayments = principal + interest

= $ 1500 + $ 360

= $ 1860

Step 3: Calculate the amount of weekly payment.

Weekly payment amount = total payments divided by the loan period, T, in recent weeks. In this case, $ 1860 divided by 104 weeks equals $ 17.88 per week.

Simple finance charge calculation is easy once you’ve done a little practice with formulas.