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. The formula accounts for compound interest and is used for mortgages, car loans, and other installment loans.

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula with prepayment adjustments:

Where:

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

Prepayment Calculation: Additional payments are applied directly to principal, reducing both the loan balance and total interest paid.

3. Importance of Prepayments

Details: Making additional principal payments can significantly reduce the total interest paid and shorten the loan term. Even small regular prepayments can lead to substantial savings over time.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate, loan term in years, and optional monthly prepayment amount. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How much can I save with prepayments?
A: Savings depend on the loan amount, interest rate, and prepayment amount. Even $50-100 extra per month can save thousands over the life of a mortgage.

Q2: Should I prepay or invest extra money?
A: This depends on your loan interest rate vs. expected investment returns. Generally, prepay if your loan rate is higher than conservative investment returns.

Q3: Are there prepayment penalties?
A: Some loans have prepayment penalties, especially in early years. Check your loan terms before making large prepayments.

Q4: How are prepayments applied?
A: Prepayments are applied directly to principal, reducing the balance on which future interest is calculated.

Q5: Is it better to refinance or prepay?
A: Compare options - sometimes refinancing to a lower rate makes more sense than prepaying a high-rate loan, but consider closing costs.