Confess – do you really understand how loan interest calculations work? Have you ever had someone sit and explain this to you when you had applied for a loan? Are you confused or even intimidated by loan interest calculations?

## Central Bank to the rescue!

- The Central Bank of the UAE in its Regulations Regarding Bank Loans & Other Services Offered to Individual Customers had clearly explained with formulae on how interest payments should work in Article (6).

- These formulae are applicable for personal loans, car loans, overdraft facilities and credit card due balances.

- Banks should also declare upfront their respective interest rates on the above-mentioned credit facilities. This rate will be determined on the basis of the reducing balance of the loan on annual basis.

- To calculate the first interest amount, the following formula should be used:

Interest
Amount = Principal

**x**interest rate**x**loan period (in months) + 1
----------------------------------------------------------------

2

**x**100**x**12- The interest amount on the reducing balance of the loan should be computed using the following formula:

Interest
Amount = Loan balance at the beginning of the month

**x**interest rate
---------------------------------------------------------------------

100

**x**12- To summarize, a bank or a finance company shall arrive at the “Interest Amount” and deduct it from the agreed monthly installment, then use the net amount to reduce the loan balance and reach the new balance of the loan at the beginning of the month which would, in turn, be used in the calculation process at the end of the following month.

## Still confused? Try online loan calculators!

- Citibank provides a very simple Loan Calculator. You select the loan amount you wish to borrow, key in the interest rate and the number of installments (in months); the Calculator returns your monthly installment amount.

- The Personal Loans Calculator from HSBC asks you a few personal and financial details including your monthly salary, the amount of loan you are looking for and your prior debt obligations and then provides you with a decision on whether you are eligible for the loan amount you are seeking. In case you are not eligible for that particular amount, the Calculator offers you a number of alternatives with different time periods.

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