How To Calculate Loan Interest Rate

Last updated on November 21st, 2022 at 04:52 pm

Most times, people apply for a loan and ask for the date of repayment without understudying the interest rate. It’s pertinent to note that a loan should be the last resort for your business

It is very very important to know how to calculate loan interest: 1) to know if it is worth it, 2) if the loan would return more profit on investment to cater for the interest rate.

Those who took a covid-19 loan in Nigeria during the pandemic can find the interest rate at: https://infomediang.com/nmfb-loan-interest-rate

In this post, we’ll show you how to calculate how much you’d be paying “on top” of your loan whether it’s a personal loan or business loan to boost your business.

Concept of loan:

A loan is the amount of money taken by an individual or organisation to support a business or for personal use on the condition that it will be repaid on a specific date with or without interest.

Types:

  • Interest loan
  • Interest-free loan (non-interest)

Interest loan

You agree to pay a certain charge rate. This is common to financial institutions and money lenders.

They make a profit from the interest rate charged on the loan you take. This could come as either a secured or unsecured loan. You are the debtor.

Interest-free loan

Interest-free loans are hard to come by. Governments that want to support SMEs usually make provisions for interest-free to boost small businesses.

When it’s interest-free, it means you only pay the principal (that is the amount borrowed) without additional charges.

This kind of loan isn’t to make a profit-making venture for the lender, but to support the borrower.

NOTE:

Some financial institutions are ready to offer non-interest loans provided you have a highly convincing business idea and ready to share the profit of the business with the lender.

Having said that, it’s very important to pay attention to the following loan terminologies:

  • The Principal
  • Interest rate
  • Date of repayment
  • Tenor
  • Maturity
  • Moneylender
  • Loanee

Principal:

The amount of money loaned or borrowed e.g N250,000 loan is the principal without additional charges.

Moneylender:

This is a person or organization whose business it is to lend money with aim of making a profit on interest.

Loanee:

A loanee is a borrower, the person who approaches a money lender or bank for financial assistance and is ready to abide by the terms and conditions of the lender including an agreement to pay both principal and interest.

Interest Rate:

It’s a rate charged or paid for the use of money borrowed. Economically, an interest rate is usually expressed as an annual percentage of the principal. It is calculated by multiplying the rate of interest by the principal.

Simply put, it is the charges you pay for borrowing money. For instance, if you took N250,000 and by the time of repayment you paid N260,000, N10,000 is the interest.

For instance, most of the NIRSAL Microfinance Bank loan is 9% which is quite fair compared to other financial institutions.

Date of Repayment:

The date on which the principal and interest must be repaid or returned. In the Yoruba language, the principle is called “oju owo” (reminremin) while the interest is called “ele” (domin)”

How to calculate loan interest

Do you want to calculate how much interest you will be paying on your loan? Here are two samples on how to calculate it:

Sample:

For example, if a bank charges you 5% interest in a year on a loan of $50,000, then the interest to be paid would be $2,500 (per annum).

To simplify the repayment mode, the loanee could opt for a monthly repayment, translating to $208/monthly

Final thoughts:

Don’t just apply for a loan, take your time to calculate the interest rate to know if it is worth it

Don’t take a loan you won’t be able or find it difficult to repay, use your sources of income to determine if a loan is appropriate for you.

The interest rate of a loan is the main profit for the lender

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