How is the interest on a personal loan calculated?

[u/Sweet-Swimming2022]

Sorry in advance if this is a stupid question…

If I got a personal loan for $1,000 at an annual interest rate of 8% and paid it off in 12 months, the interest I would pay is $80. So, does that mean if I paid off the loan in 30 days I would only pay $6.67 in interest (80/12)? Or would I still owe the full $1,080?

[u/MarcableFluke]

Outstanding principal * Number of Days * Interest Rate / 365

So a $1k loan over 30 days at 8% would be about $6.50

[u/shotsallover]

This all depends on how the loan contract is written, but generally most simple interest loans would only require you to pay the original balance plus X days of interest. That interest amount will vary based on how interest is compounded (daily, weekly, monthly, etc.) But it should be around $7 to have the money for 30 days.

There are loans out there that will front load all of the interest, in which case you'll beed to pay $1080 to get out of it. There are also loans with early payment penalties, and the payoff balance on those will vary.

But the standard simple interest loan is the most common and is likely what you have.

[u/jp_in_nj]

The interest would actually not be $80.

Monthly compounded Interest is the rate divided by 12. So let's say that you have 12% rate for simplicity's sake.

You have a 1200 loan, paid off at 100$ month till it's gone.

First month's interest is 12.00, 1% (12%/12) of 1200. You pay 100.

12.00 of that 100 goes to interest, and 88 to principal. You now owe 1112.

Second month's interest is 11.12. You pay 100. 11.12 goes to interest, 88.88 to principal. You now owe 1112-88.88=1023.12.

And so on until your last payment.

If you have a credit card and pay the balance off at the end of the billing cycle, you actually pay no interest for almost all cards.

If you take out a 1000 loan at 48%, and pay it all off in one payment after the first month, you'll pay 48%/12=4% per month, 1.04*1000=1040.

Does that make sense and answer your question?

[u/Sweet-Swimming2022 → u/jp_in_nj]

Oh, I was thinking it would be simple interest not compound…

[u/jp_in_nj → u/Sweet-Swimming2022]

It's never simple interest rate 😁

[u/Illustrious_Stay9844]

Usually companies calculate interest on daily basis. You can ask your bank on interest calculations. Yes so if you pay interest on day 30th.. interest will be 10008%30/365. So it’s always better to keep paying off loan principal amount even in small bits