1. What is Interest Rate on a Loan?

The interest rate on a loan is the proportion of the principal that a lender charges as interest to the borrower, typically expressed as an annual percentage. It represents the cost of borrowing money.

2. How Does the Calculator Work?

The calculator uses the simple interest rate formula:

Where:

• \( r \) — Interest rate (decimal)
• \( interest \) — Total interest paid (currency)
• \( P \) — Principal amount (currency)
• \( t \) — Time period (years)

Explanation: The formula calculates the annual interest rate by dividing the total interest paid by the product of the principal amount and the loan term.

3. Importance of Interest Rate Calculation

Details: Understanding the interest rate helps borrowers compare loan offers, understand the true cost of borrowing, and make informed financial decisions.

4. Using the Calculator

Tips: Enter the total interest paid in dollars, the principal loan amount in dollars, and the loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Is this simple or compound interest?
A: This calculator uses simple interest calculation. For compound interest, a different formula would be needed.

Q2: What's a good interest rate for a loan?
A: Good rates vary by loan type and market conditions. Generally, lower is better. Compare rates from multiple lenders.

Q3: Does this work for partial years?
A: Yes, you can enter fractional years (e.g., 2.5 for 2 years and 6 months).

Q4: What if my loan has fees?
A: This calculator doesn't account for fees. For APR (which includes fees), you would need a different calculation.

Q5: Why is my calculated rate different from my loan's stated rate?
A: This could be due to fees, compound interest, or if your loan has a variable rate.