1. What is the Loan Payment Formula?

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.

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula:

Where:

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

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.

3. Importance of Loan Calculation

Details: Understanding your loan payments helps with budgeting, comparing loan offers, and making informed financial decisions about large purchases.

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a percentage, and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between principal and interest?
A: Principal is the amount borrowed, while interest is the cost of borrowing that money, calculated as a percentage of the principal.

Q2: How does loan term affect payments?
A: Longer terms reduce monthly payments but increase total interest paid. Shorter terms have higher payments but lower total interest.

Q3: What is amortization?
A: The process of paying off a loan with regular payments where early payments are mostly interest and later payments are mostly principal.

Q4: Are there other loan types?
A: Yes, interest-only loans and balloon payments are alternatives, but this calculator assumes standard amortizing loans.

Q5: How accurate is this calculator?
A: It provides accurate estimates for fixed-rate loans but doesn't account for fees, variable rates, or payment changes.