How to Calculate Interest on Personal Loans

Personal Loan is an unsecured loan with no guarantor or collateral required. These loans are often used by borrowers for small purchases such as home equipments, computers, etc. To calculate the interest payment for personal loans, we use the following formula:

A = R (1 - 1(1 + i)^-n)) ÷ i
or R = Ai / (1 - 1(1 + i)^-n))
where A: Loan Amount, R: Loan Repayment, i: Interest rate, n: period

Example:
A businessman obtains a personal loan of $20,000 from a bank and he agrees to repay the loan with equal monthly payments over 5 years at 6% compounded monthly.
Calculate the amount of monthly payment and the total interest incurred.

Solution:
A = $20,000
i = 0.06 / 12 per month = 0.005
n = 5 x 12 = 60

R =  Ai / (1 - 1(1 + i)^-n))
   = 20000 x 0.005/ (1 - (1 + 0.005)^-60)
   = $386.66

Therefore, the total amount of payments = 386.66 x 60 = $23,199.36
Total Interest Incurred = $23199.36 - 20000 = $3,199.36

* Next: How to Calculate Debenture Interest
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