How to calculate interest on investment

The interest on an investment is a charge for the privilege of borrowing money to purchase or hold an investment property. It is common practice to take loans from banks or other financial organizations that charge a bit of money for the borrowed money based on how long the borrower has the loan. Anyone that is going to get involved in this way of raising money for his or her business should be well informed of how to calculate interest on their investment.

Interest on an investment can be calculated with a calculator or a spread sheet. It can also be calculated by hand if the investor so prefer. One may wonder if there is any need to do such calculations by hand. Well, technology makes things fast and highly accurate, but in this case, going about these calculations (at least part of it) manually will open one up to some details that can be really helpful in making better financial decisions.

WHAT TYPE OF INTEREST ARE YOU DEALING WITH?

There are different ways interest in charged, depending on the type of loan and the lender. A good example is the credit card company, they chare interest on a daily basis, so it is to the benefit of the borrower to pay off as soon as possible to avoid it being accumulated. However, in this case, it is an investment loan, and it has nothing to do with daily interest charges in conventional cases. Interest on investment loan is calculated monthly or annually as the case may be.

HOW TO CALCULATE INTEREST ON INVESTMENT LOAN FOR ONE YEAR

Generally, interest rates are quoted as “Annual Percentage Rate” (APR). Here is an example on how to carry out calculations on a simple interest loan
If a bank gave you an investment loan of $1000 for 1 year duration, and your interest rate is 6% per annum, how much will you have to pay them back at the end of 120 days?

The formula

Effective rate on a simple interest loan = interest / principal

Principal = $1000

Interest rate = 6% per annum

Interest = 6% per annum

Duration = 1201 days

Solution:

Effective rate = 60/1000 X 360/120

= 18%

After 120 day, which is less than the usual 1 year per annum, the effective rate will be 18% of the principal. That is $180.

Obviously, it is less favorable to keep the money for a period of time shorter than what was agreed on. It does not reduce the amount of money you are expected to pay.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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