When you borrow money, the lender charges you for using the funds. This charge is interest. The cost of the credit is paid for in small amounts over the life of the loan. Every monthly payment includes repayment of some of the borrowed amount (principal) and some of the cost of borrowing the money (interest).
Monthly payment = principal payment + interest
The mathematical formula for the computation of interest is as follows:
Interest = Principal x Rate x Time(in years)
As an example, if an individual borrows $1,000 at 12% interest due in one year, the calculation would be:
Interest = $1,000 x .12 x 1
Interest = $120
At the maturity of the loan, the borrower would pay $120 interest plus $1,000 principal for a total of $1,120.
The fractional part of a year involved in a loan is computed on the basis of a 365/366 day year using actual days of each month. If an individual borrowed $1,000 at 7.25% interest and repaid in monthly instalments over one year, the calculation would be as follows:
Date of Payment

Payment Amount

# of Days Since Last Principal Reduction

Principal Reduction

Accrued Interest

Principal Amount

08/25/09









$1,000.00

09/10/09

$50.00

16

$46.82

$3.18

$953.18

09/25/09

$100.00

15

$97.16

$2.84

$856.02

10/25/09

$75.00

30

$69.90

$5.10

$786.12

11/30/09

$75.00

36

$69.38

$5.62

$716.74

12/25/09

$50.00

25

$46.44

$3.56

$670.30

01/25/10

$75.00

31

$70.87

$4.13

$599.43

02/09/10

$80.00

15

$78.21

$1.79

$521.22

03/15/10

$75.00

34

$71.48

$3.52

$449.74

04/20/10

$100.00

36

$96.78

$3.22

$352.96

05/15/10

$75.00

25

$73.25

$1.75

$279.71

06/25/10

$75.00

41

$72.72

$2.28

$206.99

07/15/10

$75.00

20

$74.18

$0.82

$132.81

08/25/10

$133.89

41

$132.81

$1.08



Totals

$1,038.89



$1,000.00

$38.89

$0.00


As you can see from the above table, the number of days between payments and the principal balance on the loan makes a difference in the amount of interest due. Interest is always collected first with each payment before any funds are applied to principal.
Tribal Credit employees are available to explain interest and how it is calculated. Give us a call at 509.634.2664 or drop by our office.
