# How to Calculate Interest on a Promissory Note

by Kathryn Hatter

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.

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.

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.

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.

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