Guide · 7 min read
How to calculate interest on a loan, day by day
Most loan agreements in South Africa charge interest daily on the balance owed, on a 365-day year. The formula is simple. The work is in counting the days and splitting the month wherever the balance or the rate changes. This guide covers each case with a worked example.
- Interest = Balance × (Rate ÷ 365) × Days.
- Split the month wherever the balance or the rate changes.
- Work out each piece, then add them together for the month.
The daily interest formula
The rate is the yearly rate as a decimal, so 12% is 0.12. Dividing by 365 gives the rate for one day.
Example: R100,000 at 12% for September, which has 30 days, is R100,000 × (0.12 ÷ 365) × 30 = R986.30.
Daily interest or a twelfth of the year?
Some agreements charge a twelfth of the yearly rate each month instead, whatever the number of days. The two methods give the same total over a full year, but different figures month to month. Here is R100,000 at 12% both ways:
| Month | Days | Daily method | A twelfth each month |
|---|---|---|---|
| February | 28 | R920.55 | R1,000.00 |
| September | 30 | R986.30 | R1,000.00 |
| October | 31 | R1,019.18 | R1,000.00 |
| A full 365-day year | 365 | R12,000.00 | R12,000.00 |
When a lender's figures and a borrower's figures differ by a few rand every month, this is usually why. Two more details are worth checking in the agreement: whether interest starts on the day the money is paid out or the day after, and whether a leap year counts 366 days. Follow the wording, and use the same method every month.
When the balance changes during the month
A repayment or a further drawdown changes the balance from the day it happens. Work out the interest up to the change on the old balance, and from the change on the new one.
Example: a R200,000 loan at 11%. The borrower repays R50,000 on 16 September.
| Period | Days | Balance | Interest |
|---|---|---|---|
| 1 to 15 September | 15 | R200,000 | R904.11 |
| 16 to 30 September | 15 | R150,000 | R678.08 |
| September | 30 | R1,582.19 |
Charging the whole month on R200,000 would give R1,808.22, which overcharges the borrower by R226.03.
When the rate changes: loans linked to prime
Many South African loans are priced at prime plus or minus a margin. When the Reserve Bank changes the repo rate, the banks' prime rate moves with it, usually from the day after the announcement. The loan's rate changes from that date, so the month is split in two.
Example: R1,000,000 at prime plus 1%. Prime is 10.50% until 19 November and 10.25% from 20 November. (These rates are for the example only.)
| Period | Days | Rate | Interest |
|---|---|---|---|
| 1 to 19 November | 19 | 11.50% | R5,986.30 |
| 20 to 30 November | 11 | 11.25% | R3,390.41 |
| November | 30 | R9,376.71 |
A change can also be announced after month-end but take effect inside the month already worked out. If that month's interest is already posted, the difference has to be corrected in the next month or by reversing the journal.
Simple interest or interest added to the loan
With simple interest, interest is only ever charged on the capital. When interest is added to the loan each month instead, next month's interest is worked out on the higher balance, so interest starts to earn interest.
Example: R100,000 at 12%. October's interest of R1,019.18 is added to the loan, so November starts at R101,019.18. November's interest is R101,019.18 × (0.12 ÷ 365) × 30 = R996.35, against R986.30 on simple interest. Ten rand a month is small, but over a five-year loan the gap compounds.
A checklist for each month
- The balance on the first day of the month, including any interest added last month.
- Every repayment and drawdown in the month, with its date.
- The rate in force on each day, including any prime change.
- The method the agreement uses: daily or a twelfth, simple or added to the loan.
With those four things, each piece of the month is one line of the formula. The free loan interest calculator does the counting for any dates. Then post the total to Xero as a manual journal.