How do I Calculate a Reducing Rate of Interest?
- 1). Identify the index---the base number used to calculate the interest rate. The index is generally the prime rate, treasury bill (T-bill or CMT) or London Interbank Offered Rate (LIBOR). Examine your lending agreement or contact the creditor to find out which index serves as the basis for the loan.
- 2). Find out the number of the index. Once you determine the index that serves as the basis for your interest rate, find out the current rate of that index. "The Wall Street Journal" lists the prime, treasury bill and LIBOR rates on a daily basis in the newspaper or online version. You can also use interest rate websites such as Bank Rate to determine the current index rate.
- 3). Identify the margin on your loan---the set amount the creditor adds to the index in order to determine your rate. While the index rate changes, the margin does not change during the life of your loan. A dropping index causes a reduction in your interest rate.
- 4). Add the index to the margin. Simply add the index to the margin to determine your new interest rate. For example, if the current interest rate is 6 percent, with an index of 2.75 percent and a margin of 2.25 percent, the reducing interest rate would be 5 percent (2.75 + 2.25 = 5).
