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 PMT formula:

Where:

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

Explanation: The formula accounts for compound interest over the life of the loan, ensuring each payment covers both interest and principal repayment.

3. Importance of Loan Calculation

Details: Understanding your monthly payment helps with budgeting and financial planning. It also shows the true cost of borrowing through total interest calculations.

4. Using the Calculator

Tips: Enter the loan amount in dollars, annual interest rate as a percentage (e.g., 3.5 for 3.5%), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Does this include property taxes and insurance?
A: No, this calculates only principal and interest. A full mortgage payment typically includes taxes and insurance (PITI).

Q2: How does extra payment affect my loan?
A: Extra payments reduce principal faster, saving interest and potentially shortening the loan term.

Q3: What's the difference between APR and interest rate?
A: APR includes fees and other loan costs, while the interest rate is just the cost of borrowing the principal.

Q4: How does loan term affect payments?
A: Shorter terms mean higher monthly payments but less total interest paid over the life of the loan.

Q5: What is amortization?
A: The process of paying off debt with regular payments where early payments are mostly interest, and later payments are mostly principal.