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Loan Payment Formula:
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The loan payment formula calculates the fixed monthly payment required to fully repay a loan over its term, including both principal and interest. This is known as the PMT (payment) formula in finance.
The calculator uses the standard loan payment formula:
Where:
Explanation: The formula accounts for compound interest over the life of the loan, calculating a fixed payment that will pay off both principal and interest by the end of the term.
Details: Understanding your monthly payment helps with budgeting and financial planning. It also allows you to compare different loan offers and understand the true cost of borrowing.
Tips: Enter the principal amount, annual interest rate (as a percentage), and loan term in years. The calculator will show your monthly payment, total repayment amount, and total interest paid.
Q1: Why does my payment include so much interest at first?
A: Loan payments are front-loaded with interest due to amortization. Early payments cover more interest than principal, with the ratio shifting over time.
Q2: How can I reduce my total interest paid?
A: You can reduce total interest by choosing a shorter loan term, making extra principal payments, or securing a lower interest rate.
Q3: What's the difference between APR and interest rate?
A: APR includes both the interest rate and any additional fees, giving a more complete picture of the loan's cost.
Q4: Are there loans with different payment structures?
A: Yes, some loans have interest-only periods, balloon payments, or adjustable rates which change the payment structure.
Q5: How does a larger down payment affect my loan?
A: A larger down payment reduces your principal amount, resulting in lower monthly payments and less total interest paid.