Promissory note holders typically charge interest on the money they lend.
All loans individuals obtain, including mortgages, student loans, auto loans and personal loans should have a promissory note. Promissory notes specify the terms of the loan, including the amount borrowed, interest rate, how often the interest is compounded and when the money will be repaid. The lender holds the promissory note as proof of the agreement and gives a copy to the borrower. Calculate the amount of interest owed on a loan based on information contained on the promissory note.
Instructions
1. Convert the annual interest rate listed on the promissory note into a decimal for use in calculations. Do this my moving the decimal point two places left. For example, convert 8 percent to 0.08.
2. Divide the annual interest rate by the number of times per year interest is compounded. This should be listed on the promissory note. Many installment loans, such as auto loans and mortgages, compound monthly, which is 12 times per year. In this case, divide 0.08 by 12 to get an interest rate of 0.0067 each compounding period.
3. Multiply the amount owed on the loan by the interest rate for the compounding period. For example, if the promissory note states that the borrower owes $4,000, multiply $4,000 times 0.0067 to find that the borrower owes $26.80 on interest after the first month.
4. Add the interest to the balance to find the total amount owed on the loan. For example, add $26.80 to $4,000 to find that after the first compounding period, the borrower owes $4026.80.
5. Subtract the borrower's payment from the amount owed. For example, if the borrower makes a payment of $100, the starting balance for the next compounding period is $3926.80. Some promissory notes do not require that the borrower make a payment every compounding period. One example of this type of note is a student loan while the student is in school.
6. Calculate interest for subsequent compounding periods in the same manner by multiplying each starting balance by the compounding period's interest rate.
Tags: calculate, interest, promissory, note, compounding period, interest rate, promissory note, amount owed, borrower owes, owed loan, that borrower, after first
