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Yearly Payment Formula:
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The yearly payment formula calculates the fixed payment amount required to pay off a loan over a specified term, including both principal and interest components. This is known as the amortization formula.
The calculator uses the amortization formula:
Where:
Explanation: The formula accounts for compound interest over the life of the loan, calculating a fixed payment that will completely pay off the loan by the end of the term.
Details: Understanding your yearly payment helps with financial planning, comparing loan options, and determining affordability. It shows how much goes toward principal vs. interest each year.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5.25), and loan term in years. All values must be positive numbers.
Q1: How does the payment change with different terms?
A: Longer terms reduce the yearly payment but increase total interest paid. Shorter terms have higher payments but lower total interest.
Q2: What's the difference between yearly and monthly payments?
A: Monthly payments use the monthly interest rate (annual rate/12) and term in months (years×12). Monthly payments are smaller but more frequent.
Q3: How much of my payment goes toward principal?
A: Initially more goes toward interest. As the loan matures, more goes toward principal. This is shown in an amortization schedule.
Q4: How does extra principal payment affect the loan?
A: Extra payments reduce principal faster, potentially shortening the loan term and reducing total interest paid.
Q5: Are there loans that don't use this formula?
A: Yes, interest-only loans or balloon payment loans have different payment structures. This formula is for fully amortizing loans.