Understanding personal loan interest is key to estimating your monthly payments and knowing if you can afford to take a loan.
Loan interest is always expressed as an annual percentage, which is not the same as APR, but is related. In the case of personal loan interest, “annual percentage” means that the number you see is applied over a whole year, rather than each payment period, and that it is based on how much you still owe.
To figure out how interest is applied during a billing cycle, you will need to know:
- Your principal balance
- Your interest rate
- The number of days in your billing cycle
Principal is the sum of money you still owe, excluding interest. This amount should be listed on your most recent statement. Your principal is not the same as your payoff amount.
The number of days in your billing cycle should also be in your contract or on your most recent billing cycle. If you have not yet taken out a loan, and you’re trying to estimate your monthly payments, you can usually find out the length of the billing cycle on a lender’s website, or by calling their customer service line.
To show how this works, let’s say that you have a loan with $1,000 in principal remaining, a 36.5% interest rate, and a 30-day billing cycle.
First, find your daily interest rate
Convert your annual interest rate to a number by moving the decimal point two digits to the left. Divide this by 365 to get your daily interest rate.
Next, use your daily interest rate to find your periodic interest rate
Finally, multiply your periodic interest rate by your principal to find the interest added during your billing period.
It’s important to understand interest because depending on fees and terms of repayment, your interest will be only a small part of your repayment. Lenders do not want to hide this information from you. To them, the best borrower is an informed borrower.