How Do I Calculate Finance Charges


You should have some knowledge on how to calculate finance charges. You might argue that the lenders will do it for you but trust me it is always helpful if you can calculate it yourself.How Do I Calculate Finance Charges

What I can present here is a very basic procedure for calculating finance charges but your lender might have adopted a more complicated approach. Also there might be some other charges which can increase the finance charges. So what will be presented here will be a basic model only.

There are 2 parts to a loan – the principal and the interest. The principal refers to the amount of loan that has been borrowed and the profit which the lender makes by allowing you to borrow the money is referred to as the interest. The interest can be simple or variable. Both types will be explained here.

In simple interest, the mount of interest does not change over the period of the loan. This is known as fixed interest. In order to calculate simple interest the following formula needs to be applied: Interest = Principal x Rate X Time / 100.

Here interest in the amount of interest paid, principal is the amount of money borrowed, rate is the percentage of principal that is charged every year for the amount given out and this whole sum needs to be divided by 100. Time is the period for which the loan has been taken. So the formula can be stated as SI = PRT/100.

When you borrow a certain amount of money you need to return the principal amount and the amount of interest charged on that principal amount. The money is paid back in equated monthly installments or EMI. In order to calculate the monthly payment amount divide the total amount of money to be repaid by the number of months left in the loan.

In order to explain the calculations more easily let me give you an example. Suppose Mr. John buys a second – hand car at 1500$ @ 12 % p.a. There is an agreement to pay back the loan in EMI over a period of 2 years.

So in order to find out the amount of interest calculate thus I = PRT = 1500 X 0.12 X 2 = 360$. Thus calculating finance charges is easy if you know how to do it.

How Do I Calculate Finance Charges personal-finance

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