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Interest on a loan

Interest is what you pay to borrow money. For one year with no repayment, the interest is the loan times the rate as a decimal, and the debt becomes the loan plus this interest. The calculation does not include fees. The effective rate does, and is the one you should use when you compare two loan offers. Credit cards and consumer loans often have a high rate, so a small amount can become expensive if it is left outstanding.

\text{interest} = L \cdot r

interest for one year with no repayment

D = L + L \cdot r

debt after one year

Symbols

$L$	the loan	NOK
$r$	annual rate as a decimal

Example

A loan of 20,000 NOK at 9% interest, with no repayment and no fee.

The interest for one year is $20\,000 \cdot 0.09 = 1800$ NOK, so the debt is $20\,000 + 1800 = 21\,800$ NOK.

This is the nominal rate for one year. The effective rate also includes fees.

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Part of Mathematics 1P: Personal finance.