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. The formula accounts for compound interest and provides the payment amount that covers both principal and interest.

2. How Does the Calculator Work?

The calculator uses the standard 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 a fixed payment that pays off the loan exactly by the end of the term.

3. Importance of Extra Payments

Details: Making extra payments reduces the principal faster, decreasing both the total interest paid and the loan term. Even small extra payments can lead to significant savings over time.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate, loan term in years, and any additional monthly payment you plan to make. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How much can I save with extra payments?
A: Savings depend on the loan amount, interest rate, and size of extra payments. Even $50-$100 extra per month can save thousands in interest.

Q2: Should I pay extra principal or refinance?
A: Compare options - sometimes refinancing to a lower rate is better, but making extra payments avoids refinancing costs.

Q3: Are there prepayment penalties?
A: Most loans don't have them, but check your loan agreement. Federal law prohibits prepayment penalties on most mortgages.

Q4: How do extra payments affect amortization?
A: Each extra payment reduces principal, causing subsequent payments to apply more to principal and less to interest.

Q5: Is it better to make biweekly payments?
A: Biweekly payments (half the monthly amount every 2 weeks) result in 13 full payments per year instead of 12, effectively making one extra payment annually.