Finance charges are very simple to calculate: amount loaned multiplied by the interest rate multiplied by the number of days you have had the loan.
For example, assume you obtain a loan on March 1 for $1,000, the payments are $100 per month and the Annual Percentage Rate (APR) is 9 percent. You make your first payment on April 1.
You would divide the 9% by 365 (number of days in a year) to obtain the daily rate of .0247 per day. Multiply the daily rate by the number of days since you obtained the loan (31 days), which equals .7657. By multiplying that factor by the balance remaining (1,000), you find the interest amount due on April 1 is $7.66. You subtract the $7.66 from the $100 payment and find the principal reduction will be $92.66. Next month, you will start with a principal balance of $907.34.
Remember, you only are charged for the money as long as you have a balance. If you had paid $200 instead of $100, your new principal amount would be $807.34 and that figure would then be used for the next month's payment calculation, thereby saving you some interest charges.
