How to calculate the interest rate and installments of a loan?
After knowing what the interest rate is and what the different types are, it is interesting that you learn how to calculate the interest rate and how much you will pay in your loan installments.
It is very common that in personal loans they give us as information the nominal interest rate, which as we know is the rate that does not include the amortization of capital.
We will teach you to calculate some rates manually, in case your lender does not offer you that data and you need it. We will also offer links to calculators in case you prefer to avoid accounts.
Manually calculate the interest rate of a credit
As we have mentioned, the interest rate that lenders give us is usually the annual nominal interest rate.
Although you can usually ask the bank for the annual effective rate and also the monthly effective rate, it is positive that you know how to calculate both rates on your own. In this way, you will always know how much you should pay monthly and thus avoid surprises.
In this way we can use that data to obtain additional information:
Convert from nominal rate to effective rate
Let’s see how to make the conversion with an example: We have a 1% rate that capitalizes interest monthly.
The calculation of the Annual Nominal Rate or TNA can be done using the following formula:
In this case : 1% * 12 = 12%
Once we have estimated the Annual Nominal Rate, we can calculate the Annual Effective Rate or ASD with this formula:
ASD = (1 + Interest Rate) * Number of Periods in the year – 1
Following the example : (1 + 1%) 12 – 1 = 1,1268 – 1 = 1,1268 – 1 = 0,1268 = 12.68%
That is to say that an Annual Nominal Rate of 12% NAMV is equivalent to an Annual Effective Rate of 12.68%.
When there is no interest capitalization, a nominal rate is equivalent to an effective rate. That is why in simple interest there is no differentiation between nominal rate and effective rate.
In other words, the effective annual rate would be 12.68%. That difference of 0.68% is the price of capital over time.
Calculate loan installments and converter between interest rates
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For practical uses it is easier to use a calculator. Here you have a loan installment calculator. And here you have a converter between different types of interest rates.
We know it is not easy, but we hope you learned a little more today and continue to cultivate your financial education.