The straight line method of calculating interest requires that you repay an equal amount of interest, usually monthly, over the life of a loan. When applying the straight line method, the loan will not have a typical amortization schedule. This means that your loan will not apply varying amounts to the repayment of interest and principal over the life of the loan. You can manually calculate the straight line interest payment required for any loan using information about the original principal balance of the loan and the loan's interest rate.
1. Determine the principal amount of the loan and the interest rate. For example, assume you borrowed $200,000 at 5 percent.
2. Multiply the interest rate by the loan amount. Continuing the same example, $200,000 x .05 = $10,000. This figure represents your yearly interest payment.
3. Divide the yearly interest payment by the amount of loan payments due annually. In most cases, you would divide by 12, assuming the loan requires monthly payments. Continuing the same example, $10,000 / 12 = $833.33. This figure represents the interest payment due every month assuming the straight line method.
- "Principles of Finance"; Scott Besley and Eugene Brigham; 2008
- "Principles of Accounting" Belverd Needles et al; 2010
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