How to Calculate Simple Interest: Math Calculations

By

Home / How to Calculate Simple Interest: Math Calculations

Simple Interest Loan with Variable Repayments : image by Mike DeHaan

Simple Interest Loan Calculations: Example

This image shows a spreadsheet with a simple-interest loan at a fixed interest rate of 12%/year, but which allows variable repayment amounts in the “Payment /month” column.

This spreadsheet uses a straightforward monthly interest rate that is 1/12 of the annual, or 1% per month. It also assumes that the full principal amount was taken at once; interest is calculated before applying the payment; and payments are made on time. Any loan or investment you make may have different rules, such as daily interest calculations, or applying payments before calculating interest.

The “$ Interest /month” equals the “LOAN: Principal Balance” amount times the “Annual Interest Rate,” divided by 12.

For the first three months, the $50 payment is less than the interest cost. This demonstrates that for a simple interest calculator, the next interest amount is based on the current principal, not on the “Interest Balance” or “Total Balance” that includes previous interest. The monthly Interest remains $100, even though the Total Balance increases.

Once the monthly payment becomes $150, the Interest Balance dwindles by $50/month. After that, the payment in excess of the monthly interest charge reduces the principal. Then, the monthly interest cost becomes less; and the payment applied to principal increases.

Math of a Simple Interest Calculator

Learning how to calculate simple interest is a matter of multiplication along with a bit of technical vocabulary. It’s easy build your own simple interest calculator in a spreadsheet; just take care not to keep it simple – don’t compute interest on interest.

References

Simple Interest Calculator. Money Chimp. Referenced April 10, 2013.

Why Make More Than The Minimum Payment? Control Credit Card Debt. Referenced April 10, 2013. (This has a compound interest calculator).

Leave a Comment