Interest is calculated based on the loan amount, the interest rate and the term of the loan. It is the percentage of the loan amount that the lender charges you for the use of their money.
For example, if you have a home loan of $450 000 with a fixed interest rate of 4.5% and a 30-year loan term. The interest on your loan would be calculated as follows:
Multiply the loan amount by the interest rate: $450,000 x 0.045 = $20 250.
Divide the annual interest by 12 to get the monthly interest: $20 250 ÷ 12 = $1,687.50. Add the monthly interest to the monthly principal payment to get the total monthly payment: for example, if the monthly principal payment is $1,200, then the total monthly payment would be $1,687.50 + $1,200 = $2,887.50