Guide on How to Compute Loan Interest and Monthly Loan Payments in the Philippines

Plan to take out a loan in the Philippines? Do you know how to compute your loan interest? How about monthly loan payments? You’re on the right page to better grasp how interest works so that you can make informed decisions since loans have interest charges in general. Also, calculating loan interest and monthly loan payments can be complex. It’s important to realize how these factors affect your overall loan costs.

Nothing to worry about, as this article will guide you on how to compute your loan interest and monthly loan payment in the Philippines so that you can manage your finances accordingly. In addition, we’ll provide you with relevant information and tips.

Ready to learn? Scroll down now.

What is a Loan Interest?

Loan interest is the cost, rate, or percentage of borrowing money. From lenders’ perspective, it’s the amount they make by lending the money to the borrower. While from the borrowers’ part, it’s an additional payment to the borrowed amount.

Before we dive into loan interest computation, let’s first understand the three (3) essential components that will determine your interest payment.

Principal Loan – represents the sum you borrow from the lender. Mind you that the more principal you pay, the more interest you need to pay.
Interest Rate – is the portion of the principal loan that charges the borrower as interest. Take note that the cost of borrowing increases as the rate rises.
Loan Term – is the time frame in which you must repay your loan in full. Longer durations result in lower monthly payments but higher interest costs, while shorter terms are the opposite.

As stated earlier, the computation of loan interest, as well as monthly loan payments, can be a daunting task. However, by following a few simple steps and being familiarized with formulas, you’ll know how to compute.

How to Calculate My Loan Interest?

For you to have a clear idea of computing loan interest, let’s get to know the methods since lenders use a variety of approaches to demand interest from borrowers.

With the fast-paced technology, using a loan calculator is the easiest way. However, if you want the most accurate figures and preferably do it manually, here are the two methods to compute your loan interest.

1. Amortizing Interest

Installment loans like auto loans and mortgage loans are usually using this method. In fact, numerous lenders base their interest rates on an amortization plan because there’s a gradual increase in interest plus loan term extension. That’s why lenders primarily benefit from this so-called amortizing interest method.

Additionally, loans in this method have fixed monthly payments and are payable over time in equal increments. But the way the lender calculates interest varies over time. And as time draws closer to your final payoff date, payments will be more on principal and less on interest.

Let’s further explain this method through an example. For instance, you have a personal loan amounting to P30,000 which you’ll be paying in 24 months (2 years) with a fixed monthly payment of P1,250 and an annual interest rate of 5%.

Formula:

Interest = (Annual interest rate ÷ Number of payments) x Loan balance

So, with the above-given data and formula, here’s how to compute.

Divide the annual interest rate by the number of payments. The answer is 0.0021.

Interest = (5% ÷ 24)

Multiply 0.0021 by the loan balance. Notice that we haven’t made any payment yet. Thus, the loan amount of 30,000 is the loan balance amount itself.

Interest = 0.0021 x 30,000

Finally, your interest for the first month’s repayment of a loan is P 62.50

Interest = 62.50

To get the loan interest for succeeding months until you reach the 24th payment or the end term of your loan with zero balance, you’ll just repeat the process illustrated above with the new loan balance.

To know the new loan balance, find the first month’s principal amount by deducting the computed interest from the specified fixed monthly payment (by the lender). Using the same example, P1,250 less P62.50 is P1,187 as your first month’s principal amount.
Then, P1,187 deduct from the loan amount of P30,000 resulting in P28,812.50 as your new loan balance. Repeat the process to calculate another new loan balance for the succeeding interest.

The table below can be your reference to back up the mentioned process and computation above.

2. Simple Interest

The second method of computing interest is simple interest, which means a straightforward or the easiest computation of interest based on specified terms.

Formula:

Interest = Principal loan amount x interest rate x loan term

Having the same example, here’s how to get the loan interest.

Multiply the loan amount by the given interest rate and its loan term.

Interest = 30,000 x 5% x 2

Thus, your loan interest for two (2) years is a straight amount of P3,000.

Interest = 3,000

Are you getting the idea? What’s your choice of computing loan interest among the methods mentioned earlier? Well, there’s more to learn in the next part. Let’s proceed.

How to Know My Monthly Loan Payment?

Likewise, the computation of monthly loan payments can be done faster using a loan calculator, the same as calculating loan interest. You will input the loan amount, interest rate, and loan term. Then, the loan calculator will provide you with the monthly loan payment amount.

Nevertheless, to calculate accurately without a bias between borrowers and lenders, let’s show the manual computation. Also, there are two methods that we can use as follows.

1. Interest-Only Loan Payment

To better understand this method, let’s put it this way. For instance, you’ve applied for a 5-year auto loan with a principal amount of P2,000,000. The loan is payable in 60 months with an annual interest rate of 10%.

Formula:

P = a (r ÷ n) where P represents your monthly loan payment, a for the principal amount, r stands for interest rate, and n for the number of payments per year.

To calculate:

First, divide your annual interest rate by 12.

P = a (10% ÷ 12)

Then, multiply the answer by your principal amount.

P = 2,000,000 x 0.0083

Therefore, your monthly loan payment is P16,600 during the interest-only period.

Note that when your interest-only period expires, your loan becomes an amortizing loan. Let’s learn another computation method in the next section.

2. Amortized Loan Payment

This method pertains to an installment basis where borrowers pay regularly according to the timeframe set. It’s like computing your loan interest using the amortizing interest method.

An excellent example of amortized loan payment method is an auto loan. With that, let’s consider the sample scenario from the first method to compute your monthly loan payment using this second method.

Formula:

P = a ÷ { [ (1 + r) n ] – 1 } ÷ [ r (1 + r) n] where P represents your monthly loan payment, a for the principal amount, r stands for interest rate, and n for the number of payments per year.

As you notice, the formula is quite complex. So, let’s compute it by group.

We’ll refer to this part “{ [ (1 + r) n ] – 1 }” as group 1 while this one “[ r (1 + r) n]” as group 2.

We’ll start with group 1”{ [ (1 + r) n ] – 1 }”:

Divide your interest rate of 10% by 12, and the answer is 0.0083.

{ [ (1 + 0.0083) n ] – 1 }

Plus 1 for the computed interest rate.

{ [ (1.0083) n ] – 1 }

Then, multiply the answer by 12.

{ [ (1.0083) 12 ] – 1 }

{ [12.0996] – 1 }

After, deduct 1 to get the value of group 1.

{11.0996}

Group 1 is equal to 11.0996 or rounded off 11.10

Next to compute is referred to as group 2 “[ r (1 + r) n]”:

Add the computed interest rate with 1.

[ 0.0083 (1.0083) 12]

Multiply the result by 12 and then the computed interest rate.

[0.10042668]

Group 2 is equal to 0.10042668 or rounded off 0.1004

Now, let’s proceed to get the monthly loan payment.

So, the value for this part “{ [ (1 + r) n ] – 1 }” is 11.10 while this one “[ r (1 + r) n]” is 0.1004.

Thus,

P = a ÷ { [ (1 + r) n ] – 1 } ÷ [ r (1 + r) n]

P = 2,000,000 ÷ {11.10} ÷ [0.1004]

Divide the principal amount by the answers we just computed above.

P = 2,000,000 ÷ {11.10} ÷ [0.1004]

P = 2,000,000 ÷ 110.56

Therefore, your monthly loan payment is P18,089.72.

As you noticed, the interest-only method is more effortless than amortized loan payment method. Also, the latter has higher monthly payments than the former method. However, both help compute your monthly loan payments. More than these computations, paying your loans on time is a must.

The Importance of Paying On Time

For every loan you have, it’s best to pay it back on time. If you don’t pay loans on time, you could have difficulty getting approved for loans in the future.

Here are some key points to keep in mind about paying your loans on time:

Paying your loans on time shows that you’re a responsible borrower, and lenders will surely give you better terms.
Failure to pay loans on time can result in late fees, damage to your credit score, and even legal action.
Timely loan payments can help you build up positive equity in your home or car loan.
Paying off your loans on time can relieve some financial stress and give you a sense of accomplishment.
Ensure that you understand the terms of your loan and how to make payments on time.
If you’re having trouble making your loan payments on time, you can talk to your lender about getting a payment suspension, which will allow you to cope with loan payments.

To summarize, it’s best to pay your loans on time. But if you can’t make it, better to find ways the soonest because late fees can ruin your cash flow. Besides, before applying for a loan, you must check if you can pay. Or else it’s not good to take out a loan.

In conclusion, loan interest and monthly loan payments are factors when applying for a loan. By learning the guides, tips, and information mentioned earlier, you’ll have a better understanding before you can take out a loan in the Philippines. Although the process may seem complex, remember that a lot of resources are available to help you such as RFC’s cash loan calculator and financing loan calculator. With a little research and planning, you can be sure to get the best deal possible.