Initially, the idea of taking out a loan to pay off a debt may be a great alternative, but what if you don't pay the loan on time and the debt amounts accumulate? How do I calculate interest on a loan or debt?

The fact is that if you don't know about calculating interest and the difference between simple and compound interest, don't worry. Well, today we're going to tell you everything about loan interest!

So, loan interest is the remuneration that the creditor receives for the loan borrowed. This means that the person or financial institution that provided the credit, that is, the money, receives a percentage of this value – the loan interest.

This is because they serve to cover transaction costs and are responsible for the creditor's profit.

It is important to mention that the person or financial institution that provides the loan money is called the creditor. On the other hand, the individual who receives the credit is called the debtor.

Therefore, loan interest needs to be well calculated so that it does not become a big snowball full of debts!

So, to calculate simple interest on a loan, we’ll take you step by step!

Initially, the rate is only applied to the initial capital, this means that debt growth is linear. So, let's assume you borrowed R$1,000.00 at an interest rate of 10% per year for 3 years. Like this:

In other words, after three years, you will receive around R$1,300.00: the sum of the R$1,00.00 borrowed + R$300 in simple interest. In this case, the interest for each period will be R$100.00.

This is because the 10% rate is applied to the initial value and does not include interest for the period, as occurs with compound interest.

And in addition, there is also the following mathematical formula: J = C * i * t where:

Thus, applying the formula: R$ 1,000.00 (C = borrowed capital) to be paid over a period of three years (t = time) at a rate of 10% per year (i = interest rate for the period), the formula will be as follows:

J = C * i * t

And so, the interest on the interest loan amounts to R$ 300.00, and it is important to mention that the interest rate was transformed into a decimal number, that is, 10% became 0.1.

And now that you know how to calculate simple interest, we will teach you compound interest step by step.

For this, the first difference in relation to simple interest is the application of the rate which, in the case of compound interest, will be applied to the interest incorporated into the initial capital over time, being called interest on interest.

Therefore, the way compound interest grows is exponential. So, let's look at the example: Following the same example given by simple interest: Capital of R$1000.00 loaned at a compound interest rate of 10% per year for 3 years.

Therefore, removing the R$1,000 (borrowed capital) from the R$1,331.00 (capital + interest for the period), we have R$331.00 of compound interest. Thus, the formula used will be: M = C(1+i)^t where:

Where M =R$ 1,000.00*(1+0.1)^3 = R$ 1,000.00*(1,1)^3

M = R$ 1,000.00*1.331 = R$ 331.00.

Thus, by subtracting the invested capital from the amount you will discover the interest value, being R$331.00 in interest.

So, in compound interest, the second installment represents 10% on the value of the previous installment. This means that, assuming that an institution applies a rate of 10% per month to pay off the debt and R$100 is the value of the installment, then in the first month, the interest would be around 10% of this amount.

That is, R$10 resulting in R$110.00. In this case, the second partnership would represent 10% of R$110, totaling R$121.00, since 10% of R$110.00 is R$11.00. So, the installment amounts will be different each month, but the interest will always represent 10% of the installment paid in the previous month.

So, as we mentioned previously, there are two formulas for calculating interest: simple and compound.

In this sense, compound interest is the most used formula, being used in the financial market to calculate financing and loans.

On the other hand, simple interest is uncommon, more used in short-term operations. Therefore, following the step-by-step instructions we taught you above, you will be able to calculate the interest on a debt, so that you can plan for the long term!

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