Loan Payment Formula:
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The reducing balance method (also called amortization) calculates loan payments where each payment reduces the principal balance. Interest is calculated on the remaining balance, not the original loan amount, making it fairer than flat interest rate methods.
The calculator uses the standard amortization formula:
Where:
Explanation: The formula accounts for compound interest over the life of the loan, calculating equal monthly payments that pay off both principal and interest by the end of the term.
Details: Accurate loan calculations help borrowers understand their repayment obligations, compare loan offers, and plan their finances effectively.
Tips: Enter the principal amount in USD, annual interest rate as a percentage (e.g., 5.25 for 5.25%), and loan term in years. All values must be positive numbers.
Q1: What's the difference between reducing balance and flat rate?
A: Flat rate calculates interest on the original principal for the entire term, while reducing balance calculates interest only on the remaining balance, typically resulting in lower total interest.
Q2: How does loan term affect payments?
A: Longer terms reduce monthly payments but increase total interest paid. Shorter terms have higher monthly payments but lower total interest.
Q3: Can I calculate payments for weekly or biweekly payments?
A: Yes, adjust the rate (divide annual rate by number of periods per year) and term (multiply years by number of periods per year) accordingly.
Q4: Why is my actual bank payment slightly different?
A: Banks may use slightly different rounding methods or add fees/insurance that aren't accounted for in this basic calculation.
Q5: How can I pay less interest overall?
A: Make additional principal payments when possible, choose shorter loan terms, or negotiate lower interest rates.