What is an interest rate calculator?
An Interest Rate Calculator works backwards from a loan you already know: enter the amount borrowed, the term and the monthly payment, and it finds the interest rate those numbers imply. That is handy when a dealer or lender quotes only a monthly payment, or when you want to check the rate on an existing loan.
How to use it
- Enter the loan amount.
- Enter the loan term in years and months.
- Enter the monthly payment.
- Click Calculate to see the interest rate, total payments, total interest, a graph and an amortization schedule.
How Interest Rates Work
Interest rates can be based on simple interest or compound interest. Simple interest is calculated only on the original principal, while compound interest considers previously accumulated interest as well. Compound interest can have a significant effect over longer periods because interest can continue to accumulate on earlier interest.
Interest rates are used across many areas of personal and business finance. They influence the cost of mortgages, auto loans, savings accounts, certificates of deposit, investments, and credit products. A higher borrowing rate generally increases the total amount repaid, while a lower rate can reduce financing costs when other loan terms remain the same.
Interest rate formula
The calculator uses the standard loan payment formula:
M = P × r(1 + r)^n ÷ ((1 + r)^n − 1)
where M is the monthly payment, P is the loan amount, n is the number of payments and r is the monthly rate. There is no way to rearrange this to solve for r directly, so the calculator tries different rates (iteration) until the payment matches yours, then multiplies r by 12 to give the annual rate.
Example
You borrow $20,000 for 5 years and pay $400 a month. The rate that makes 60 payments of $400 repay $20,000 is about 7.4% a year. Over the loan you pay $24,000, so about $4,000 is interest.
Fixed vs. Variable Interest Rates
Interest rates are commonly classified as fixed or variable. A fixed interest rate remains unchanged for the agreed period, which makes payments easier to predict and can provide protection if market rates increase. Fixed rates are commonly associated with financial products where payment stability is important, such as many traditional mortgages and personal loans.
Variable interest rates can change over time based on a reference rate, market conditions, or other factors specified in the loan agreement. A variable rate may begin lower than a fixed rate, but future changes can increase or decrease the borrower’s payments. The difference between these two rate types is important when evaluating the long-term cost and risk of a loan.
Tips
- If a dealer quotes only a payment, use this calculator to see the rate you are really being charged.
- Fees that you pay separately are not included; use the APR Calculator to include them.
- Compare the result with offers from banks or credit unions before you sign.
Frequently Asked Questions
A higher interest rate generally increases the amount of interest paid over the life of a loan. A lower rate can reduce the total borrowing cost when the loan amount and other terms remain the same.
A fixed interest rate remains unchanged for the agreed period, while a variable interest rate can change according to market conditions or a specified reference rate.
No. The interest rate generally represents the basic cost of borrowing, while APR can include certain fees and other loan costs. APR is therefore useful when comparing similar financing offers.
Credit history, loan term, loan amount, down payment, type of loan, lender requirements, market conditions, and economic factors can all influence the interest rate offered to a borrower.
An interest rate is the percentage charged for borrowing money or earned on money deposited or invested. For loans, it represents part of the cost a borrower pays to the lender.
Disclaimer: This calculator gives estimates for general information only. It is not financial, tax or legal advice. Results depend on the numbers you enter and on simplified assumptions, so your actual figures may differ. Check important decisions with a qualified professional or the official source.
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To compare loan costs in other ways, try these calculators.