Whenever someone borrows money, regardless of whether the loan is for education, a home, a card, or in terms of credit, there is usually something called an annual percentage rate (APR) involved. This APR is the way a lender makes money with the transaction, sometimes very little if the borrower is prompt with repayment, and sometimes making more than 100% of the money they lent. Moreover, this interest on the loan is recalculated for every month a payment is due, and is never based on the entire amount borrowed after the first repayment.

In terms of mathematical calculation, a monthly payment based on APR and the amount remaining is equal to the borrowed amount multiplied by the interest rate, that quantity is divided by twelve, and then added to the borrowed amount. After this first payment the ‘borrowed amount’ will be replaced by the ‘remaining balance’. The example of the math is as follows, using a borrowed amount of $1,000, an interest rate of 18%, and a repayment rate of $60.

(($1,000×0.18)/12) + $1,000 = $1,015

$1,015 – $60 = $955

The $955 is the remaining balance after the first month. The calculation will repeat accordingly and continue to shrink at a slow rate, finishing the repayment after 20 months with the above numbers and only paying the lender approximately $160. Larger repayments will reduce the remaining balance much faster and earn the lender less in terms of accumulated interest payments. Had this been made in minimal payments, it would have probably amounted in close to $1,000 in interest fees.

As APR is focused on the interest rates applied throughout the year, it is not representative of total payments. Late fees, processing fees, and other amounts need to be factored in as well, but are too varying to factor in with any set equation. The best thing to do is pay all initial fees and never be late on a payment, since set late fees can be nearly three times the payment due with some financial institutions, which can even make the deadline and mail in date too short to respond to. This is a form of predation that a borrower needs to be attentive of.

All above calculations and numbers were provided using a Microsoft Excel spreadsheet. Although there are formal calculation website tools out there, it is just as easy to perform informational calculations by your own estimations and unique factors. Using a fixed payment rate above (but can be easily variable in Excel), it was set up as follows:

Column A (the amount borrowed, and then the remaining balance):

A1: 1000

A2: =B1-60 Note: 60 is the payment, and can be changed for each cell if needed

A3 down are filled using the drag feature on A2

Column B (the amount due after the interest for the month has been added on):

B1: =((A1*0.18)/12)+A1 Note: 0.18 equals the APR at 18%

B2 down are filled using the drag feature on B1

Column C (monthly interest totals):

C1: =B1-A1

C2: =C1+(B2-A2)

C3 down are filled using the drag feature on C2

Fees, balances, interest rates, and payments can be changed as needed for individual computation.