Enter the principal amount, annual interest rate, and capitalization period into the calculator to determine the total loan amount after capitalization. This calculator helps to understand the impact of interest capitalization on the total amount owed.
Loan Capitalization Formula
The following formula is used to calculate the total loan amount after capitalization.
TL = P * (1 + r)^n
Variables:
- TL is the total loan amount after capitalization ($)
- P is the principal amount ($)
- r is the annual interest rate (as a decimal)
- n is the capitalization period (years)
To calculate the total loan amount after capitalization, multiply the principal amount by one plus the annual interest rate raised to the power of the capitalization period.
What is Loan Capitalization?
Loan capitalization is the process of adding unpaid interest to the principal balance of a loan. This typically occurs when the borrower is not making interest payments during a deferment or forbearance period. As a result, the interest is capitalized, and the total loan amount increases, which can significantly affect the cost of the loan over time.
How to Calculate Loan Capitalization?
The following steps outline how to calculate the total loan amount after capitalization.
- First, determine the principal amount (P) of the loan in dollars.
- Next, determine the annual interest rate (r) as a percentage.
- Next, convert the annual interest rate to a decimal by dividing by 100.
- Next, determine the capitalization period (n) in years.
- Next, gather the formula from above = TL = P * (1 + r)^n.
- Finally, calculate the total loan amount after capitalization (TL) in dollars.
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem :
Use the following variables as an example problem to test your knowledge.
Principal amount (P) = $10,000
Annual interest rate (r) = 5%
Capitalization period (n) = 4 years
