Calculate Interest on Note Payable

Overview

Sometimes, the company may sign a promissory note to borrow money from the creditor or the bank, which usually comes with the interest on the note payable. In this case, the company needs to calculate interest on note payable in order to prepare sufficient money to pay its creditor or bank when it is due (either interest or principal plus interest).

Calculate interest on note payable

The company can calculate the interest on note payable by multiplying the face value of the note payable with the interest rate and the time in the note maturity.

The interest rate and the time in the note maturity need to be matched. For example, if the interest rate in the note is stated as a certain percent per month, the time needs to be converted into a fraction of the month too.

Though, the interest rate in the promissory note is usually stated as an annual interest rate. Likewise, the time in the note maturity needs to be converted to the fraction of a year by dividing it by 360 if it is stated in the number of days or dividing by 12 if it is stated in the number of months.

Interest on note payable example:

For example, on June 01, the company ABC borrows $50,000 from a bank by signing a promissory note to pay the interest of 8% per annum together with the principal at the end of 6 months of the note maturity.

In this case, the company ABC can calculate the interest on note payable as below:

Interest on note payable = 50,000 x 8% x 6/12 = $2,000

In this case, the company ABC needs to pay the interest on note payable of $2,000 and the principal of $50,000 back to the bank at the end of the note maturity.