Answer: Interest rates are often quoted as annual rates. In addition, your loan balance may change every month. As a result, you really need to calculate monthly interest charges to accurately understand where your money goes.
To do so, start by dividing your annual interest rate by 12. There are 12 months in a year, and each month would create 1/12th of your interest costs if your balance never changed. As an example, if your interest rate is 10%, convert the percentage to a decimal and divide:
- .10 / 12 = .0083 (more or less)
Next, calculate the monthly interest by multiplying the monthly rate by your balance. Assuming your balance is $100, you’d use 0.83% times $100:
- .0083 x $100 = $0.83
If you prefer not to calculate your interest every month, you may be able to get the information from your bank or lender. It’s a good idea to run the calculations yourself so that you understand the process -- and so you can check on your lender. However, you probably don’t need to do it every month. Try downloading transactions online to see if you get a breakdown of interest expenses.
You can also have a spreadsheet or online calculator to calculate monthly interest costs for you. This is especially helpful for amortizing loans like auto loans and home loans. Find out how to calculate loans from start to finish.