Unearned Interest Calculator

Formula

The formula to calculate the Unearned Interest (UI) is:

\[ UI = P \cdot r \cdot (n - t) \]

Where:

$ UI $ is the Unearned Interest ($).
$ P $ is the Principal Loan Amount ($).
$ r $ is the Annual Interest Rate (decimal).
$ n $ is the Total Number of Periods (years).
$ t $ is the Number of Periods Elapsed (years).

What is Unearned Interest?

Unearned interest refers to the portion of a loan that has been given out but the interest on it has not yet been earned by the lender. This usually applies to loans where the interest is calculated and added to the total loan amount at the beginning of the loan period. Until the borrower makes payments, the interest portion of the loan is considered unearned by the lender. It is essentially the interest income that the lender expects to receive in the future as the loan is paid off.

Example Calculation

Consider an example where:

Principal Loan Amount (P): $10,000
Annual Interest Rate (r): 0.05
Total Number of Periods (n): 5 years
Number of Periods Elapsed (t): 2 years

Using the formula to calculate the Unearned Interest:

\[ UI = 10000 \cdot 0.05 \cdot (5 - 2) = 1500 \]

This means that the unearned interest for this example is $1,500.