1. What is the Loan Payment Formula?

The loan payment formula calculates the fixed monthly payment required to fully amortize a loan over its term. This is the standard formula used by banks and financial institutions.

2. How Does the Calculator Work?

The calculator uses the loan payment formula:

Where:

• \( PMT \) — Monthly payment
• \( P \) — Principal loan amount
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Number of payments (loan term in months)

Explanation: The formula accounts for both principal repayment and interest charges, distributing payments equally over the loan term.

3. Importance of Loan Payment Calculation

Details: Accurate payment calculation helps borrowers understand their financial commitments, compare loan offers, and budget effectively.

4. Using the Calculator

Tips: Enter the loan amount in dollars, interest rate as a decimal (e.g., 5% = 0.05), and loan term in months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How do I convert annual rate to monthly?
A: Divide the annual percentage rate by 12 (months) and convert from percentage to decimal (e.g., 6% annual = 0.06/12 = 0.005 monthly).

Q2: Does this include taxes and insurance?
A: No, this calculates only principal and interest. Actual mortgage payments may include escrow for taxes and insurance.

Q3: What's the difference between this and credit card payments?
A: Credit cards typically use daily compounding and variable rates, while this formula assumes fixed rates and monthly compounding.

Q4: How does extra payments affect the calculation?
A: Extra payments reduce principal faster, shortening the loan term. This calculator assumes fixed payments throughout the term.

Q5: Can I use this for car loans?
A: Yes, this formula works for any fixed-rate installment loan including auto loans, personal loans, and mortgages.