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Loan Payment Formula:
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The loan payment formula calculates the periodic payment amount for an amortizing loan. This formula is used for mortgages, car loans, personal loans, and other installment loans where payments are made at regular intervals.
The calculator uses the amortization formula:
Where:
Explanation: This formula calculates the fixed payment amount that covers both interest and principal repayment over the loan term, ensuring the loan is fully paid off by the end of the term.
Details: Accurate payment calculation is essential for budgeting, loan comparison, financial planning, and understanding the true cost of borrowing. It helps borrowers determine affordability and make informed financial decisions.
Tips: Enter principal amount in dollars, interest rate as a decimal (e.g., 0.05 for 5%), and number of payment periods. All values must be positive numbers.
Q1: What's the difference between monthly and annual rates?
A: If your loan has an annual rate but monthly payments, divide the annual rate by 12 to get the monthly rate. For example, 6% annual = 0.06/12 = 0.005 monthly.
Q2: How does payment amount change with different terms?
A: Longer terms result in lower monthly payments but higher total interest paid. Shorter terms mean higher payments but less total interest.
Q3: What is amortization?
A: Amortization is the process of paying off a loan through regular payments that cover both principal and interest over time.
Q4: Can this formula be used for credit cards?
A: This formula is designed for installment loans with fixed payments. Credit cards typically use different calculation methods for minimum payments.
Q5: What if I want to include additional payments?
A: This calculator shows the standard required payment. Additional payments would reduce the principal faster and shorten the loan term.