How to calculate loan interest?

Calculate loan interest It is a practice that, unfortunately, is not part of the routine of most customers who sign up for a credit proposal.

And this can end up becoming a real problem, especially if we consider the number of people who take out loans and, over time, are unable to pay them back.

But why does this happen? After all, why is it so important to calculate interest? How do we do it?

If you're looking to organize your financial life and manage your credit healthily, today's content was created especially for you.

Therefore, to learn how to deal with interest on loan agreements, don't miss the following material!

The importance of calculating loan interest

Taking out a loan has the power to help the applicant financially, as long as they make good choices.

This is because credit can make it possible to execute any plan for which the full amount is not available for payment in full.

But if there's one thing that can take this situation from a positive scenario to a real nightmare, it's certainly failing to evaluate the loan terms.

And, by “conditions” we refer to the interest charged, which corresponds to the fees applied to installment payments, and consequently brings profit to the banks.

This means that the longer the loan repayment period, the more interest will be charged, as interest is usually calculated based on a monthly rate.

Therefore, if you don't calculate the interest, you may end up in situations that lead to default, such as:

• Opt for few installments, but with high amounts, which makes it impossible to pay on time, as it takes up a lot of income and is not an essential expense;
• Choosing to pay in large installments over a long period of time, which drags on the debt for a long time and consequently increases the chances of defaulting on payments;
• Taking out a loan with interest rates higher than permitted, which would put you in a financial loss situation.

It's worth mentioning that these are just a few examples, as not calculating loan interest can have a number of other consequences.

So, for those who want to use the loan responsibly and intelligently, without running the risk of financial loss, they should keep an eye on this calculation!

How do I find out the loan interest rate?

When you search for how to calculate loan interest, the first thing that comes up is a specific calculation used by experts.

However, we know that most people don't necessarily want this information, but rather want to know specifically what interest rate is applied to their contract.

This is because the idea is to know whether it is within the value determined by the Central Bank, or if it is above, which configures the situation of charging abusive interest.

Furthermore, knowing the monthly rate makes it easier to calculate, based on the length of the contract, how much interest you will pay.

So, we'll now look at some practical tips to help you find the interest rate applied to your loan.

However, if you also want to learn about the calculation, don't worry, we'll see that soon!

Check the modality

It is known that the interest rates applied vary according to the type of credit in question.

This is because the interest on a real estate financing contract has different values than those applied to common personal loans.

And, it's worth mentioning that even in the lending sector, this variation exists, so that a loan with a loan guarantee has different rates than one with a property guarantee, for example.

Therefore, the first thing to do when you want to calculate loan interest is to learn about the modality.

This makes it easier to know the maximum rate applied in the market for a given modality.

By knowing the market average, you can get an idea of how advantageous the type of loan you want to take out is, and whether there are better options.

Have the Central Bank as a source

In the previous topic, we clarified the difference between interest rates for the different types of credit on the market.

Therefore, it is clear that for each type of loan we can observe the charging of a specific percentage of interest rate per month, and annual interest rate.

But who sets these rates? Where can I find the average total market rates?

The answer to both questions is the Central Bank of Brazil, responsible for setting the country's base interest rate, which is the Selic rate.

The Selic rate guides the application of interest rates across the market as a whole, so many rates are calculated based on it.

But, in addition to the Selic, on the Central Bank's website you can also check a complete list of rates applied by all banks operating in Brazil, for each type of credit.

By checking this list, you will have the answer about the average interest rate for a given type of loan.

This way, you can know if your contract is within the average, above average, and if it is worth taking your loan contract to another lender.

This is very important information for calculating loan interest.

Keep an eye on your loan agreement

Finally, the last important step in calculating loan interest is to check your contract.

This is because, after knowing the market average, you can know whether your deal is within or above the market.

But by reviewing your contract, you can also access detailed information, seeing what types and amounts of fees will be charged over the years of payment.

Some contracts even provide a sort of spreadsheet, detailing how interest will be charged and how this will affect the value of the installments over time.

See how to easily calculate loan interest

Previously, we saw a series of information that helps us consult and thus understand the interest rates applied to the loan agreement.

However, simply knowing the rate charged is not enough to know the total amount of interest in the contract, that is, how much of the amount paid will correspond to interest.

The good news is that there is a specific calculation for this, and it is very simple, so we can do it at home.

The calculation is as follows:

Total interest = loan amount x annual interest rate x contract term

Let's apply it to an example, so you can understand better.

The example would be a loan of R$1,000.00, with an interest rate of R$121 per year, for 12 months. So, it would look like this:

Total interest = 1,000 (loan) x 0.12 (interest rate) x 12 (contract length)

This totals 1,440, but we still need to withdraw the loan amount, since only the remaining amount corresponds to interest.

So, in our example, the interest corresponds to R$ 440.00.

This is a basic calculation that you can use to find out how much interest will be owed on the total cost of the contract.

So, now that you know how to calculate loan interest, take the opportunity to check the terms of your agreement and determine whether it's advantageous.