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. This formula accounts for both principal and interest payments.

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula:

Where:

• \( P \) — Principal loan amount (USD)
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Total number of payments (loan term in years × 12)
• \( PMT \) — Fixed monthly payment amount (USD)

Explanation: The formula calculates the fixed payment that will pay off the loan with interest by the end of the term, with each payment covering both principal and interest.

3. Importance of Loan Amortization

Details: Understanding your monthly payment helps with budgeting and financial planning. The amortization schedule shows how much of each payment goes toward principal vs. interest.

4. Using the Calculator

Tips: Enter the loan amount in USD, annual interest rate as a percentage (e.g., 5.25), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between principal and interest?
A: Principal is the original loan amount borrowed. Interest is the cost of borrowing that money, calculated as a percentage of the principal.

Q2: Why does the formula use monthly rate?
A: Most loans require monthly payments, so we convert the annual rate to a monthly rate by dividing by 12.

Q3: How does loan term affect payments?
A: Longer terms mean lower monthly payments but more total interest paid over the life of the loan.

Q4: What is an amortization schedule?
A: A table showing each payment's breakdown between principal and interest, and the remaining balance after each payment.

Q5: Does this work for all loan types?
A: This formula works for standard fixed-rate loans. Adjustable-rate loans or loans with balloon payments require different calculations.