# How to calculate the cost of a credit? The credit is a loan of money that a financial institution grants to a client with the commitment that the bank will receive said loan back by means of the payment of installments or in a single payment, but with an additional interest as a compensation for the time He couldn’t use that money.

It is a good alternative to finance projects or acquisitions if we do not have enough capital at the moment. Therefore, it is important to know aspects such as the cost of a loan and know how to calculate interest .

## What is the cost of the credits? The Total Cost of Credit (CTC) is what we will end up paying for the credit we request. It is an indicator that indicates the final amount that we will pay for the loan, adding the requested capital, the interest charged by the bank, the insurance that we contract and the associated expenses.

Suppose you want to buy a new computer. You enter the store and see the model you need at the price of 300,000 dollars. However, you don’t have the capital, so you ask the bank for a credit for that amount. The loan you decide to pay in 2 years and the contract stipulates an annual interest of 10%. Therefore, you will have to pay for those two years 15,125 per month, with the loan totaling 363,000 dollars.

## How to calculate the interest of a credit? First we must distinguish between two types of interest :

• Simple interest: are the interests generated by an initial capital in a span and that do not accumulate in a later period. It is given only as long as the interest rate and term remain stable. To calculate this interest rate we must consider three variables: capital, rate and time.

We can calculate simple interest by applying this formula:

I = P xixn

In this case, I represent the final interest, P is the initial capital, and the applied interest rate and n is the credit time period.

• Compound interest: refers to when the interest earned at the end of the credit period is reinvested and added to the initial capital.

Compound interest can be calculated as follows:

S = P x (1 + i) n

P represents the initial capital, ia the interest rate of the period, n the period of time and S the final capital.

## How to calculate the cost of a credit? Examples In the Banca Tacil portal, of the Superintendence of Banks and Financial Institutions, we can find a simulator of the cost of a loan based on the following example:

If the monthly interest rate on a loan is 3%, we promise to pay \$ 3 for every \$ 100 earned. If the capital remains for more than one period, the interest rate is applied on amounts that increase their value progressively.

If we ask for a credit of \$ 10,000 and the monthly interest rate is 3%, in a month we will be paying \$ 300 as compensation based on the following formula: \$ 10,000 * 3% = \$ 300.

In the second month, the monthly salary of 3% is applied in a greater amount due, in this case of \$ 10,300. Therefore, if we apply the following formula \$ 10,300 * 3% = 309, we will have to return \$ 309 more. Thus, the debt implies the delivery of the borrowed, that is, \$ 10,000 plus the payment for the use of the money (\$ 609 = 300 + 309). In total: \$ 10,609.

Calculating the cost of a loan and its interest is important to determine what our ability to pay and if we have the necessary liquidity to meet our debts.