1. What is the Loan Payment Formula?

The loan payment formula calculates the fixed monthly payment required to pay off a loan over a specified term. This formula is used by banks and financial institutions to determine loan payments.

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula:

Where:

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

Explanation: The formula accounts for both principal repayment and interest charges over the life of the loan.

3. Understanding Amortization

Details: Amortization is the process of spreading out a loan into fixed payments over time. Early payments consist mostly of interest, while later payments apply more toward the principal balance.

4. Using the Calculator

Tips: Enter the loan amount in USD, annual interest rate as a percentage, and loan term in years or months. The calculator will show your monthly payment and full amortization schedule.

5. Frequently Asked Questions (FAQ)

Q1: How does extra payment affect my loan?
A: Extra payments reduce the principal faster, decreasing total interest paid and potentially shortening the loan term.

Q2: What's the difference between APR and interest rate?
A: APR includes both interest rate and loan fees, giving a more complete picture of borrowing costs.

Q3: 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.

Q4: What types of loans use this formula?
A: This applies to fixed-rate mortgages, auto loans, personal loans, and other installment loans with fixed payments.

Q5: Why does my bank's calculation differ slightly?
A: Banks may use slightly different rounding methods or account for fees not included in this basic calculator.