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 PMT formula:
Where:
Explanation: The formula accounts for compound interest over the life of the loan, ensuring each payment covers both principal and interest.
Details: Understanding your monthly payment helps with budgeting and comparing different loan options. It also shows the total cost of borrowing.
Tips: Enter the loan amount in USD, annual interest rate in percentage, and loan term in years. All values must be positive numbers.
Q1: Does this include property taxes and insurance?
A: No, this calculates only principal and interest. A complete mortgage payment may include taxes and insurance (PITI).
Q2: How does loan term affect payments?
A: Shorter terms mean higher monthly payments but less total interest. Longer terms reduce monthly payments but increase total interest.
Q3: What's the difference between APR and interest rate?
A: The interest rate is the cost of borrowing, while APR includes fees and other loan costs, giving a more complete picture.
Q4: Can I pay extra to reduce the term?
A: Yes, additional principal payments can shorten your loan term and reduce total interest, but check for prepayment penalties.
Q5: How often is interest compounded?
A: For most mortgages, interest is compounded monthly, meaning interest is calculated on the outstanding balance each month.