In situations when you are short on funds and need money to settle a pressing need, obtaining a loan from a bank is a viable option to consider. However, banks charge interest on loans their customers obtain from them. So, before you think about obtaining a loan from any bank in Nigeria, know that you’d be charged interest when repaying the loan. In this article, we’ll be discussing how to calculate bank interest on loans to help you get a proper view of what you’d repay when you obtain a loan from a bank in Nigeria.
How to calculate bank interest on a loan would be discussed below:
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What Does Bank Interest on Loan Mean?
Interest is simply the charge lenders, such as banks, impose on loans borrowed. Basically, interest is the price you pay for borrowing money from a lender, in this case, a bank. Interest rate is the rate imposed on the money borrowed, and it is usually expressed as an annual percentage of the principal loan amount.
When a borrower approaches a bank to obtain a loan, the bank will first ascertain the capability of the borrower to repay within a reasonable time frame. Once the borrower has been adjudged to be capable of repaying the loan, the applicable interest on the loan will be made known to him (or her). Then, it is left for the borrower to accept or reject the offer.
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Why is it Important to Learn How to Calculate Bank Interest on a Loan?
Before you go ahead to obtain a loan from a bank in Nigeria, you’d want to know much money you would repay after interest and applicable fees. The knowledge of calculating bank interest on loans cannot be overstated. If you know how to calculate bank interest on loans, you’d be able to compare the offerings between banks to find out which is more suitable for you, thereby helping you save money.
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How to Calculate Bank Interest on Loan in Nigeria
In this section of this article, we’ll be explaining two ways that bank interest on loans can be calculated in Nigeria. The first method we will discuss is the mathematical method which involves the use of a formula to calculate loan interest while the other option is the loan calculator that most financial institutions in Nigeria that offer loans give their customers access to.
The first method of calculating bank interest on loans is the mathematical method of using the simple interest formula. To calculate simple interest, the borrower has to have the right information available, including the principal loan amount, the interest rate offered by the bank, and the loan term. With the aforementioned information handy, you can easily calculate your total interest using the simple interest formula.
Before we proceed to provide the formula for calculating simple interest, it is pertinent to note that the monthly payment is fixed, but the interest to be paid each month is based on the outstanding principal balance. In view of this, paying off the loan early could make one save a sizable amount of interest, assuming there is no prepayment penalty charge imposed by the bank.
Now, let’s provide the simple interest formula and explain how bank interest on loans can be calculated. We’d also use an example to drive home the point. Below is the formula for calculating simple interest:
Simple interest = Principal loan amount × Loan term × Interest Rate
Below is an illustration of how to calculate bank interest on a loan using the Simple Interest formula:
Let’s calculate what the interest on bank loans would be if you took out a five-year loan for N20,000,000.00 from Carseal Bank at an interest rate of 9 percent.
Solution
Simple interest = 20,000,000 × 5 × 0.09
= 9,000,000
From the calculation above, the bank interest on the N20,000,000 loan obtained from Carseal Bank at 9% interest rate is N9,000,000.
The next method of calculating bank interest on a loan, particularly for people who don’t want to solve mathematics before they can determine what the interest on a loan obtained is, is the loan calculator. A loan calculator is basically a tool that allows you to predict how much interest you’d pay on a bank loan. Not only does the loan calculator predict the interest on bank loans, it also indicates the total amount to repay over the loan tenor and the minimum monthly amount to remit.
To use the loan calculator to determine bank interest on a loan, simply go to the website of the banking institution you obtained your loan to access the loan calculator for free. Most banks in Nigeria have loan calculators available on their websites for their customers to access for free. Just as the mathematical method of determining bank interest on a loan requires some specific information to calculate interest, the loan calculator likewise works by supplying specific details of the loan in the available boxes and clicking “calculate”.
The specific information needed to supply an online loan calculator to determine bank interest on a loan includes the principal loan amount, the interest rate, and the loan term. With these details, it is very easy to calculate bank interest on a loan using the loan calculator.
Although simple interest is the most common way banks in Nigeria calculate the interest on loans obtained by their customers, there is also the compound interest method. However, compound interest is mostly used for loans with extended loan terms.
In the compound interest method, the interest rate applies to both the principal loan amount and also the accumulated interest made during previous periods. When you obtain a loan from a bank and the compound interest method is applied, the bank assumes that at the end of the first year you owe the principal loan amount plus interest for that year. And for the end of the second year, the bank also assumes that at the end of the second year, you owe the principal plus the interest for the first year plus the interest on interest for the first year.
Below is the formula for calculating compound interest:
Compound interest = p X [(1 + interest rate)n − 1]
where:
p = principal loan amount
n = number of compounding periods