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Lano
last online: 04/30, 6:26
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Does anyone here understand how to calculate interest?

I figure it would be good to double check myself when getting a loan to make sure i don't get screwed.


Let's say you borrow 10,000 at a 10 percent interest rate for 5 years.


Can you show what formula you use to calculate?

And is that what all financial institutions use? Is there a logic to it?

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financial, institutions, logic, interest, calculate
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Roccoflip
(20 minutes after post)
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This is called compound interest.
The formula is this:

A = P(1 + (r/n))^nt

A = final amount
P = initial principal balance
r = interest rate
n = number of times interest applied per time period
t = number of time periods elapsed

So, with your numbers:

A = ???
P = 10,000 -- initial loan
r = 0.1 -- 10% = 10/100 = 1/10 = 0.1
n = 1 -- Assuming interest compounds yearly
t = 5 -- Number of years

A = 10000 * (1 + 0.1/1)^(1*5)
A = 10000 * 1.1^5
A = 10000 * 1.61051
A = 16105.1

So you'd end up paying $16,105.10 at the end of your 5 year period.

https://www.google.com/search?q=compound+intere...
There are many online calculators that will help you out with these, but yes- this is standard. Compound interest is used across investments, loans, and general banking, as well as many other things. It's less of a "common formula" and more just how things work.

Of course, many of them compound monthly, but in order to keep things simple they tell you the yearly interest. To get the monthly interest, just divide the yearly interest by 12 and then multiply either the period or number of compounds by 12. You can see the numbers get a lot harder to work with, but you'll end up with the same results in most situations, assuming you're not paying it down over time. Some institutions might charge interest on the full amount and other loans might be based on the amount still owed. Usually it's the former, but credit card debt is based on the current amount rather than the total.

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last online: 04/30, 6:26
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(4 hours after post)
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Thanks. I found similar explanations online but needed a human to explain it to me.

it's intersting....when you hear interest percentages, it intuitively makes it sound like its some percent of your loan....but its more like just a number that goes into a formula. Its not really a percent of anything.

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