How to Calculate the Interest on Floating and Fluctuating Rates
- 1). Find the current prime rate. The prime rate is the rate that top commercial banks charge their preferred customers. Most lenders use the prime rate as the base rate that serves as an index for floating interest rates. The Wall Street Journal reports on the prime rate every week.
- 2). Find the risk premium. Banks and other lenders assess borrowers and tack on percentage points above the prime rate according to the risk that the borrower presents. The extra percentage points are called a "risk premium." A floating rate equals the index rate plus the risk premium. For example, a floating low-risk mortgage rate might be the prime rate plus 2 percent while a floating high-risk credit card rate might be the prime rate plus 30 percent.
- 3). Find out when the interest is due. Lenders generally collect interest every month, six months or year, but any individual loan can have different terms and may figure or collect interest daily, biweekly, every three months or by using another period.
- 4). Multiply the balance due in a time period by the floating rate -- index plus risk premium -- to get the interest for that period. For example, a $1000 loan payment with an interest rate of 5 percent would equal $50 in interest for a total payment of $1050. If the rate is the prime rate plus 2 percent and the prime rate moves from 3 percent to 4 percent, the interest rate goes up to 6 percent and the interest payment goes up to $60.
- 5). Figure interest for different time periods separately because the interest payment is different each time. Add together the interest for each period to reach the total amount of interest you have paid.
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