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Here's the 3 formula for calculating the type of interest, and the risk of the giver or recipient of the loan

Written By Hanny & Melissa on Friday, June 21, 2019 | Friday, June 21, 2019

Loans are a type of debt that can involve all types of tangible objects. Like other debt instruments, a loan requires redistribution of financial assets over time between the borrower and the lender.

The borrower initially receives a sum of money from the lender to be repaid, often in the form of periodic installments to the lender. This service is usually given at a certain cost, which is called interest on debt.

For this reason, if when you are going to apply for a loan specifically to a bank, it is better to consider several things in advance such as the type of interest offered, the amount of interest, and the amount of installments that you will pay in the future.

But, have you ever looked for how to calculate loan interest, if you applied for the loan ...?. To be honest, the method of calculating loan interest is indeed not widely known by the public. Whereas actually knowing how to calculate loan interest is no less important if you are like going to apply for a loan to a bank.

Each type of loan has a difference in the way the interest is calculated. Although the amount of interest rates is the same, but by means of different calculations will affect the amount of installments that you have to pay each month. Generally there are three types of loan interest calculations for all loan products, among the 3 types namely:

1. Flat rate calculation

Flat interest rates are the easiest calculation of loan interest. By using a flat interest calculation, you will pay the principal and interest installments the same amount, every month. The calculation is usually used to calculate interest on unsecured loans, or loans without collateral.

Flat interest rates are also referred to as fixed interest rates, where the credit ceiling and the amount of interest will be calculated in balance according to the credit period. Then, for the interest value will remain the same every month because it is calculated based on the percentage of interest multiplied by the principal loan plus interest each month.

Calculation formula, Monthly Interest = (P x l x t) / nm


P = Loan principal

l = Interest rate

t = Amount of credit period

nm = Number of months in the credit period

2. Calculation of Effective Interest Rates

Effective interest rate calculation also known as a sliding rate is a calculation of interest on loans made at the end of each installment period. Credit interest is calculated from the final balance of each month. Interest is calculated based on the principal value that has not been paid by the borrower. That way the amount of interest each month will change according to the unpaid principal value.

Mean while, the interest paid by the borrower will decrease every month so that the installments will shrink from time to time. The second month's installments will be smaller than the first month's installment month, the third month's installments are smaller than the second month's installments, and so on.

The calculation formula, interest = S x i x (30/360)


S = The loan principal balance of the previous month

i = Annual interest rate

30 = Number of days in a month

360 = Number of days in a year

3. Calculation of Annuity Interest Rates

Calculation of annuity interest rates is a form of modification of effective loan interest calculations. It aims to make it easier for customers to pay installments each month. This loan interest calculation determines the amount of the installments each month with the same amount but the composition of the interest and the principal installments will change every period.

Then, for the interest value per month will decrease but the principal installments will increase. This interest calculation makes the portion in the initial period of the loan very large but will gradually shrink at the end of the loan.

The calculation formula, interest = SL x i x (30/360)

Information :

SL = the loan principal balance of the previous month

i = Annual interest rate

30 = Number of days in a month

360 = Number of days in a year

To be known and understood, the annuity calculation calculation formula is the same as the effective interest calculation formula.

Adverse effects & risk of loans

A person who has a loan dependency is usually due to his need for something that is necessary, or does not need to be done without further consideration. Remember that loans or debts have interest that must also be taken into account. The need for something or service to support our needs must be owned. But as people who study economics, at least we can fulfill our own needs first.

You must be able to determine whether your debt is able to be repaid later or vice versa. However, some people often override this and think everything will be fine, even though there are many adverse effects that can arise from loans or debt. What are the adverse effects of a loan or debt, if you can't manage it. The following are the bad effects of the loan, namely:

1. Having Debt Means No Purpose

2. Loans to repay loans

3. Mental changes from borrowing

4. Loans or debts that are considered Additional Funds.

5. Debt without counting first

Risk of lending

Here are the risks that you might face when giving a loan and tips to mitigate those risks.

1. Failed to Pay

The main risk in lending is the possibility of default by the borrower. Acceleration has carried out a rigorous feasibility and risk analysis to minimize this. Diversify lending to further mitigate this risk.

2. Collateral Liquidity

Even though a loan is secured by collateral, the difficulty of selling collateral or falling collateral value is one of the risks of lending. Acceleration emphasizes the borrower's cash flow and the quality of collateral in analyzing the feasibility and risk of loans. Acceleration also provides substantial discounts on the market value of illiquid collateral.
Diversify lending to further mitigate this risk.

3. Legal Process.

Legal disputes with borrowers will be settled through a judicial process. however, the outcome of the judicial process is unpredictable and has the potential to take a long time. Acceleration will take the most effective legal route assisted by experienced legal consultants in dealing with any legal disputes with borrowers. Diversify lending to further mitigate this risk.

Such is the loan interest calculation formula commonly used on every loan product such as banking and others. By knowing the loan interest calculation formula, you can find out the loan repayments that must be paid every month.

That way, you can prepare your finances in advance, so that when the loan repayment period can be repaid in a timely manner, and in accordance with the provisions provided by the borrower. Then what needs to be known is that, whatever the form of both the borrower and the lender, both of them have a very high risk. This means that be careful that you are both a borrower and a lender, one of which can result in a legal process. May be useful...

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