For example, suppose you bought a car for $12,000. You paid a $3,000 down payment and financed the rest. The principal on your car loan would be $9,000.
For example, if your car loan had an annual interest rate of 7%, you would express this in the simple interest formula as 0. 07.
For example, if you took out a 60-month car loan, you would divide 60 by 12 (the number of months in a year) to determine that the loan is 5 years. The formula I=Pin{\displaystyle I=Pin} can also be used if you have a loan term expressed in months or weeks. This formula is a little different in that “i” represents the interest rate during each period and “n” refers to the number of periods. You would divide the annual interest rate by the number of periods in a year to get the right value for “i,” then use the total number of months for “n. " Whether you adjust the time period or the interest rate, you should get the same result.
P=9,000{\displaystyle P=9,000} r=0. 07{\displaystyle r=0. 07} t=5{\displaystyle t=5} The interest owed is $3,150. 3,150=9,000x0. 07x5{\displaystyle 3,150=9,000x0. 07x5}.
Continuing with the previous example, the total amount owed would be $12,150. 3,150+9,000=12,150{\displaystyle 3,150+9,000=12,150}. You can combine both equations together if you’re looking for the total amount of money that will be accumulated over the life of the loan or investment by using the formula A=P(1+rt){\displaystyle A=P(1+rt)}.
For example, suppose you bought a house for $150,000. You made a $50,000 down payment and took out a mortgage on the rest. The principal of your mortgage would be $100,000.
For example, if the annual interest rate on your mortgage is 8%, you would use 0. 08 in the compound interest formula.
For example, if you have a 10-year mortgage on the house you bought, you would use 10 in the compound interest formula.
For example, if your mortgage compounds interest monthly, it would be compounded 12 times in a year. In your compound interest formula, this value is represented by an “n. “[10] X Research source In the case of an investment, interest would be compounded until the end of the deposit term, or until you withdrew your investment.
P=100,000{\displaystyle P=100,000} r=0. 08{\displaystyle r=0. 08} n=12{\displaystyle n=12} t=10{\displaystyle t=10} The total amount paid over the life of the mortgage would be $221,964. 221,964 = 100,000 (1 + 0. 08/12)12(10). The total interest paid would be $121,964. 0. Compound interest can be significantly greater than simple interest, particularly over the long term. If the same mortgage had simple interest, you would only pay $80,000 in interest over the life of the loan.
