How does interest work?

Question

My aunt wants to loan some money from me... i want to add interest. But i dont know how interest works. Can anyone kindly explain it to me. Eg if she wants to borrow $100 and i add 1% interest, how does that work?

Answer 1

Hi, rather than explaining how interest works, I'll go one step further and show you how to calculate your interest month by month.



Assuming your aunt borrows $500 from you and both of you agreed the interest rate should be 5%.



At the end of the first month, your interest will be $500 x 5% / 12 months = $2.08. You add this interest to the loan amount. So, she owes you $502.08.

- If she pays you back $50, then $502.08- less $50 = $452.08. At the end of the 1st month she owes you $452.08

- If she doesn't pay you back anything, then at the end of the first month, she owes you $502.08



Now in the 2nd month, your interest will be $452.08 x 5% / 12 = $1.88 months (or $502.08 x 5% / 12 = $2.09 ). Add this to $452.08 (or $502.08 if she didnt pay you anything) and repeat the steps you did in the 1st month.



Do this until your aunt pays you back all the loan.



Now that you know how to calculate interest, you should already know how interest works.

Answer 2

To add 1% interest to $100 principal, simply multiply $100 by 1.01. The total payment would be $101 ($100 principal + $1 interest) in your hypothetical example. How often is interest charged? If it is monthly, the $1 interest would be for the first month; if it is annually, it would be due at the end of the first year of the loan; etc.



Interest may also compound. In such cases, any unpaid interest would be added to the principal. You can have interest compound at any rate (daily, weekly, biweekly, monthly, annually, whatever.) The balance will grow faster when interest compounds daily or weekly as opposed to monthly or annually. Interest which is computed only on the principle balance (and not on the principal PLUS any unpaid interest) is called simple interest.

Answer 3

typically, if you wanted to add interest of 1% that would be 1% per year.... so she would owe you $101 at the end of the first year... after that, you'd have to see how much of the loan she paid off, then deduct that amount from $101...and refigure the interest after that for the next year, and repeat the process until the loan is paid off. Why not be nice and give her an interest-free loan?

Answer 4

$100 + $1 = $101

Answer 5

If she wants to borrow money and you want to charge interest, you have to agree on how much interest you're charging and at what term. For example, she wants to borrow $100 and you want to charge 1%, the interest amounts to $1. If you're going to charge interest monthly (term), it means your aunt has to pay you $1 interest per month. You also have to agree if you're going to charge the interest based on the original amount owed or on the remaining balance in case you receive partial payments. So basically, that's how interest works. It will be a little more complicated in terms of bank financing, etc. though.

Answer 6

you also need to determine a time period. $100 with 1% interest for one year would mean that she owes you $101 at the end of the year. for one month means that you figure the interest every month. at the end of the first month she owes you $101.



just take the principle x the interest x time period = interest on balance

p=100

i=5%

t=monthly 12

60 interest 100 principle = 160 total

Answer 7

i'll make it easy for you!

take the amount loaned ($100) x amount of interest (.01%) = ($1.00).

then x that by how much time the loan will be for (6 months) = ($6.00)

then add the total amount of interest ($6.00) + amount loaned ($100.00) = ($106.00)

this is what she will owe you for making the loan!



interest rates at the bank now are anywhere between 8%-12% and thats the same amount of interest you should be asking for!



good luck!

Answer 8

Its not nice to charge your relations interest. That is a mean spirited thing to do. It's bad enough that banks and lending institutions do so. I am sure she wouldn't ask you for the money if she didn't need it for something important. Your certainly on your way to being a loan shark!

Answer 9

well if it was a 100 loan with 10% intrest it would be 10.00