Interest on loans and savings accounts are usually expressed on a yearly basis. Estimating what you will pay or earn in interest is usually a simple matter of dividing your annual rate by 12. However, financial institutions often calculate interest on a daily basis and pay out "interest on interest," otherwise known as "compound interest." Research the terms of your loan or savings account so you know which calculation to use.

## Simple Interest Calculation

To calculate simple interest paid monthly, multiply your loan or savings balance by the interest rate. For example, if your loan amount is $10,000 and your annual percentage rate is 10 percent, the interest over one year is $1,000. Divide that amount by 12 to calculate the amount of interest per month, which is $83.33. Often, a monthly loan payment will be more than the cost of the interest. For example, on a loan payment of $100, $83.33 will go to interest, but $16.67 will go to the principal. Your loan balance is therefore reduced to $9,983.33, and the following month your interest is $83.19. As a result, as you pay down your principal the amount of interest you are charged will be less.

## Daily Periodic Rate

Months have as few as 28 or as many as 31 days. Financial institutions often come up with a monthly interest amount using a daily periodic rate. A loan that has an annual interest amount of $1,000 is divided by 360 or 365 days, depending on the bank, which results in a daily rate of $2.78 or $2.74. Interest is then charged by the number of days in the month. A daily interest charge of $2.78 would result in a $86.18 interest charge for a month with 31 days and a charge of $77.84 for a month with 28 days.