1. What is the Loan Payment Formula?

The loan payment formula calculates the fixed monthly payment required to repay a loan over a specified term, including both principal and interest. This is known as the PMT (payment) formula in financial mathematics.

2. How Does the Calculator Work?

The calculator uses the PMT formula:

Where:

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

Explanation: The formula accounts for compound interest over the loan term, calculating the exact payment needed to fully amortize the loan.

3. Importance of Loan Payment Calculation

Details: Understanding your monthly payment helps with budgeting and financial planning. It allows you to compare loan offers and determine affordability before committing to a loan.

4. Using the Calculator

Tips: Enter the principal 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: Does this include taxes and insurance?
A: No, this calculates only principal and interest. Mortgage payments often include escrow for taxes and insurance, which would be additional.

Q2: How does loan term affect payments?
A: Longer terms reduce monthly payments but increase total interest paid. Shorter terms have higher payments but lower total interest.

Q3: What's the difference between APR and interest rate?
A: APR includes fees and other loan costs, while interest rate is just the cost of borrowing principal. Always compare APRs when shopping for loans.

Q4: Can I pay extra to reduce the term?
A: Yes, additional principal payments reduce the loan balance faster and can shorten the term, saving interest. Check for prepayment penalties.

Q5: How accurate is this calculator?
A: This provides standard amortization calculations. Actual loan terms may vary based on lender policies and fees.