Calculate Loan Interest in Given Year

When you borrow money, you are supposed to repay it gradually. Lenders, on the other hand, want to be compensated for their services and the risk they incur by lending you money. That is, you will not just repay the money you borrowed. You’ll repay the loan plus interest.

Interest is a significant source of revenue for lenders, banks, and credit card issuers. Here’s an overview of how interest works and how to calculate loan interest in given year using Excel CUMIPMT function.

Calculate loan interest in given year1

What is interest on a loan?

Interest is the cost of borrowing money from another person. If you borrow $6,000 for a personal loan, you may end up owing the lender about $7,130 in interest over the next five years. That additional $1,130 is interest.

Calculate loan interest in given year1

Calculate loan interest in given year1

As you return the loan over time, a part of each payment is applied to the amount borrowed (referred to as the principal), and the remainder is applied to interest expenses. The amount of loan interest charged by the lender is decided by factors such as your credit history, income, loan amount, loan conditions, and existing debt load.

Calculate loan interest in given year

To maximize earnings, lenders charge interest in a variety of ways. Calculating loan interest may be challenging, since many forms of interest need additional mathematics.

Simple interest

Provided a lender employs the simple interest technique, calculating loan interest is straightforward if you have the necessary information. Collect information such as the principal loan amount, the interest rate, and the total number of months or years you intend to repay the loan.

Calculation

You may use the following calculation to get your total interest: Interest is calculated as the principal loan amount multiplied by the interest rate multiplied by the time period (a.k.a. the number of years in the term).

For instance, if you get a five-year loan for $20,000 at a rate of 5%, the basic interest calculation is as follows:

20,000 multiplied by .05 multiplied by five equals $5,000 in interest.

On short-term loans, you may find basic interest. However, the manner in which the majority of banks and lenders calculate interest is more sophisticated.

Amortizing loans

Numerous lenders assess interest on an amortization schedule. Student loans, mortgages, and automobile loans are often included in this category. While the monthly payment on these loans is set and the loan is paid in equal installments over time, the lender’s method of applying your payments to the loan amount varies over time.

With amortizing loans, the early payments are often high in interest, which means that less of the money you spend each month goes toward paying down the principal loan balance.

However, as time passes and you approach the payback date of your loan, the tables flip. Toward the conclusion of the term of your loan, the lender will apply the bulk of your monthly payments to the principal debt and less to interest costs.

Calculation

Divide your interest rate by the total number of payments that year. If your interest rate is 6% and you make monthly payments, divide 0.06 by 12 to get 0.005.

Multiply that figure by the remaining loan total to get the amount of interest you’ll pay that month. If your loan sum is $5,000, your first month’s interest will be $25.

Subtract the interest from your set monthly payment to get the amount of principal due in the first month. If your lender has said that your fixed monthly payment would be $430.33, you will make the first month’s payment of $405.33 toward the principal. This sum is deducted from your current balance.

Repeat the procedure the next month with your new remaining loan amount, and continue doing so for each future month.

Calculate Cumulative Loan Interest in Excel

What is Cumulative Loan Interest?

When comparing different types of loans, many people want to know what is Cumulative Loan Interest. The sum of all interest payments you’ve made on a loan is referred to as cumulative interest. Different lenders calculate interest payments differently, but cumulative interest is an important metric when comparing interest costs on two loans.

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Calculate Cumulative Loan Interest Excel

If you have a loan that you would like to know the total interest paid over a period of time, you can use the Excel financial function CUMIPMT to calculate this information. You can use the same calculation method for other loans as well.

To calculate the interest rate on loan, you need first to determine how much you have borrowed. A straight-line loan, for example, requires that you pay a fixed amount every period, but interest accrues over time. The Excel function will then return the interest rate for the period. You can also enter example data and use it for practice problems and quizzes. Ultimately, you will need to know the interest rate on loan to determine how much it will cost you.

 Generic Formula:

=CUMIPMT(rate,nper,pv,start,end,type)

Summary:

The formula applied in C10 is:

=CUMIPMT(B3/B6,B5,B2,1,B5,0)

calculate cumulative loan interest excel1

Syntax:

  • Rate: Interest rate for a specific period
  • Nper: Total number of payments
  • Start_period: First period of interest
  • End_period: last period of interest.

With the given inputs, you can evaluate the total interest paid!

Clarification:

Excel has a CUMIPMT function that calculates the cumulative loan interest between two periods. It can also compute the total amount of interest paid for a loan. It can calculate the present value of all payments for a certain period and can also determine the type of due date for each payment. It can also be used for comparing the total amount of money owed to a previous loan. The advantages of using Excel for calculating interest on a loan are endless.

Conclusion:

Using the CUMIPMT function to calculate cumulative loan interest is also helpful. You can specify the number of periods over which you want to calculate the interest and the Start and End periods for which you want to calculate the cumulative interest. This will reveal the amount of cumulative loan interest that will be due over a period of time.

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