How is the total interest expense of a loan calculated?

The total interest expense of a loan is calculated by finding the difference between the total payments made over the life of the loan and the original loan amount itself. This method captures the total cost of borrowing, taking into account all the monthly payments made, which include both principal and interest.

When a borrower takes out a loan, they agree to repay the loan amount (the principal) along with interest over a specified term. The total payments made throughout the loan term (which consist of many individual monthly payments) represent the total amount that the borrower has paid back to the lender. By subtracting the original loan amount from this total payment figure, one arrives at the total interest paid, reflecting the cost of borrowing the money.

This calculation is essential for borrowers to understand their financial obligation and for lenders to assess the profitability of the loan.