Flat Interest Calculation
The flat interest method calculates interest on the loan amount (principal) for the term of the loan.
The calculations are:
Interest = P * r/100 * n
Interest Installment = Interest / # of Repayments
Principal Installment = P / # of Repayments
Payments = Interest Installment + Principal Installment
Where,
P = loan amount (principal)
r = rate of interest per period (e.g., per year, per month)
n = term of the loan
For example, a client borrows $1000 (P) with a interest rate of 2%(r) per month for four(n) months with four monthly payments.
Interest: $1000 * 2/100 * 4 = $80
Interest installment: $80 / 4 = $20
Principal installment: $1000 / 4 = $250
Monthly installment (principal and interest): $20 + $250 = $270
Related articles