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. It accounts for the principal amount, interest rate, and loan duration.

2. How Does the Calculator Work?

The calculator uses the loan payment formula:

Where:

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

Explanation: The formula accounts for compound interest over the life of the loan, calculating the fixed payment that will pay off both principal and interest by the end of the term.

3. Importance of Loan Payment Calculation

Details: Understanding your monthly payment helps with budgeting and loan comparison. It's essential for financial planning when taking mortgages, auto loans, or personal loans.

4. Using the Calculator

Tips: Enter the principal amount in dollars, monthly interest rate as a decimal (e.g., 0.005 for 0.5%), and number of monthly payments. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How do I convert annual rate to monthly?
A: Divide the annual percentage rate (APR) by 12 (months) and by 100 (to convert to decimal). For example, 6% APR = 0.06/12 = 0.005 monthly.

Q2: Does this include taxes and insurance?
A: No, this calculates principal and interest only. For complete payment estimates, add property taxes, insurance, and other fees.

Q3: What's the difference between PMT and P+I?
A: Early in the loan, payments are mostly interest. Later, they shift to principal. PMT remains constant while the P/I ratio changes.

Q4: How does loan term affect payment?
A: Longer terms reduce monthly payments but increase total interest paid. Shorter terms have higher payments but lower total cost.

Q5: Can I use this for credit cards?
A: Only if you're doing fixed-rate, fixed-term payments. Most credit cards use different calculation methods.