How to Calculate the Interest Rate on a Loan

calculating interest rates on a loan

If you have ever wondered what it might cost you to borrow, calculating the interest rate for a loan is not all that complicated. To calculate the interest rate on a loan you would take the principal amount, or the amount borrowed, and multiply that by the interest rate, then multiply by the loan term. 

For example, if you have a 5 year loan of $10,000 with an interest rate of 12%, your monthly fixed payment would be $222.44, assuming there were no additional fees. The total amount of interest paid would amount to $3,346.67 and after 60 payments (5 years or 60 months) you would repay a total of $13,346.67 for the loan.

Now that you know a little more about how a personal loan interest rates calculated, let’s look at some other aspects you should be aware of when comparing.

There are different types of interest rate calculations used by lenders, from simple interest to amortizing interest, which often depend on the type of loan. You’ll find most personal loans and short term loans will use a simple interest calculation. 

What is a Good Personal Loan Rate

When it comes to borrowing, it’s usually about what you qualify for based on your credit profile. A good personal loan rate requires an excellent credit score and can be below 10% as a fixed rate for an unsecured personal loan. 

While some believe you would have to go to the bank or credit union, many online lenders are able to compete and even beat their rates. Other factors that can affect where you qualify for a good personal loan rate besides your credit score can include your debt to income ratio, the length of the loan term requested, and what amount of income you might have. 

What is a Typical Interest Rate on a Personal Loan 

When you are wondering what is the standard interest rate for a personal loan, the short answer is it depends. Lenders have several considerations before they are able to provide you with an interest rate. When a lender is looking to provide an interest rate while evaluating your application, it is often related to your credit score and a few other factors.

The following provides an approximation of typical interest rates for personal loans.

Credit ScoreRatingSample Interest Rate
300 – 559Very Poor18% to 47%
560 – 659Poor15% to 35%
660 – 724Fair7% to 20%
725 – 759Good6% to 15%
760 – 900Excellent5% to 11%

The above table provides an idea of personal loan rates in Canada but does not reflect actual rates a lender may offer and is provided as a demonstrative example for rates.

RELATED: What to Know About Canadian Personal Loan Rates

What is the Interest Rate on an Installment Loan 

An installment loan are an alternative to a personal loan which is often from 6 months to 24 months, although it can be longer, and an alternative borrowing option for someone that does not have good or excellent credit. The interest rates of an installment loan will usually be higher than that of a personal loan. Referring to the chart above, the interest rates for installment loans will usually align with someone that has a fair or poor credit rating.

What is the Interest Rate for a Bad Credit Loan 

When you have bad credit the interest rate for a loan tends to be higher. The lower your credit score, the higher your interest rate on average. For those seeking a bad credit loan the interest rate is likely to align with someone that has a poor or very poor credit rating. 

RELATED: Comparing Installment Loans vs Personal Loans

What is the Interest Rate on a Payday Loan 

If you have ever asked yourself do short term loans have higher interest rates, its almost always a yes for the answer. The interest rates on payday loans are based on the term, which is typically until your next payday and two weeks for most, but when you look at the annualized percent rate or APR the cost to borrow can be very expensive. This type of loan is usually not recommended and an installment loan would be a better choice.

RELATED: What to Know About Borrowing Money Online 

Online Loans – Before You Borrow

A couple of quick tips when looking to borrow start with not just looking at the interest rate, but also the APR, or annualized percentage rate. This provides a better idea of the cost of borrowing as it factors in additional costs. If looking at just the interest rate you will not get a true sense of what it might cost to borrow. Details like these would be found in the loan agreement, which you should always review before signing with a lender. 

You should also limit yourself to only borrowing what you can afford in terms of monthly payments, take a shorter term so you pay less interest, and once again, read the agreement. 

When you start looking to borrow a personal loan or other type the interest rate is a good way to start comparing your options, but it isn’t the only thing to look at. 


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