How is total annual interest calculated on a loan?

Total annual interest on a loan is calculated by taking the loan balance and multiplying it by the interest rate. This is based on the principle that interest is paid on the total amount borrowed over the course of a year.

For example, if you have a loan of $100,000 with an annual interest rate of 5%, the total annual interest would be $100,000 multiplied by 0.05, which equals $5,000. This formula provides a straightforward method to ascertain the cost of borrowing over a year, reflecting the amount one would need to pay just as interest irrespective of how the loan payments are structured (monthly, quarterly, etc.).

The other options do not accurately represent how total annual interest is derived. While multiplying the monthly payment by 12 gives an annual payment amount, it does not specifically isolate the interest component. Dividing the loan balance by the interest rate does not yield meaningful information regarding interest either. Finally, multiplying the annual payment by the number of years confounds total payments with interest and principal, therefore failing to distinguish the interest amount specifically.