what is the formula for calculating interest on short-term loans?

Expert Solution

By short term loan, it is meant that the loan is extended for a period lesser than a year. So the loan is expected to be repaid every month or any other payment frequency the parties agree upon. There is no clear cut formula to determining interest if it involves multiple payments. The key to finding out the interest on short term loan is determining the principal amount outstanding during every payment.

The basic formula to compute interest is:

Interest= principal outstanding* interest rate adjusted for the period outstanding

The above formula is used in every case but the formula has to applied appropriately depending on the situation as explained below with example.

Example: when the loan is repaid with interest on the date of ending of the loan period

Lets take the example of a loan of $50000 at the rate of 10% per annum to be repaid in 4 months.

At the end of the four months, the loan has to be repaid fully with interest. Here, we can see that the principle amount of 50000 is outstanding for the whole period of 4 months. The interest will be calculated om $50000 for 4 months at 10%.

Interest= (50000*10%* 4)/12= $167 (rounded off)

ekkarill92 answered 7 months ago

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