How to Calculate Interest on a Promissory Note

by Kathryn Hatter ; Updated April 19, 2017
Figure the interest owed on a promissory note with a basic formula.

When a borrower receives a loan, a promissory note may document the agreement. As a signed promise to repay the loan at a specific time, the promissory note may also include interest that will be due with repayment. Calculate interest on a promissory note with a basic formula that includes the principal amount, the interest rate and the time period of the loan.

Step 1

Read the promissory note to find the relevant information required to calculate the interest. Determine the principal amount of the loan, the interest rate and the time of the loan -- expressed in either years, months or days.

Step 2

Multiply the principal by the interest rate to begin the formula. For example, if the principal is $5,000 and the interest rate is 15 percent, multiply 5,000 by 0.15 to equal 750.

Step 3

Calculate the time period. For a yearly time period, multiply the product by the number of years. For example, for a three-year promissory note, multiply 750 by 3 to equal 2,250. For a monthly time period, multiply the product by the number of months. For example, for a nine-month promissory note, divide 9 by 12 to equal 0.75. Multiply 750 by 0.75 to equal 562.50. For a daily time period, multiply the product by the number of days. For example, for a 90-day promissory note, divide 90 by 365 to equal 0.25. Multiply 750 by 0.25 to equal 187.50.

Tips

  • The historic method of daily interest calculation involved dividing by 360 instead of 365, based on 12 30-day months. Most financial institutions today utilize the 365- or 366-day interest calculation method.

About the Author

Kathryn Hatter is a veteran home-school educator, as well as an accomplished gardener, quilter, crocheter, cook, decorator and digital graphics creator. As a regular contributor to Natural News, many of Hatter's Internet publications focus on natural health and parenting. Hatter has also had publication on home improvement websites such as Redbeacon.

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