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 interest. The formula accounts for compound interest over the life of the loan.

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)
• \( n \) — Number of payments (loan term in years × 12)
• \( PMT \) — Monthly payment amount

Prepayment Adjustment: Additional payments reduce the principal faster, potentially shortening the loan term and reducing total interest paid.

3. Importance of Prepayment Calculation

Details: Understanding how prepayments affect your loan helps in financial planning. Even small additional payments can significantly reduce total interest and shorten the loan term.

4. Using the Calculator

Tips: Enter the loan amount, annual interest rate, loan term in years, and optional monthly prepayment amount. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

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

Q2: Should I prepay principal or invest instead?
A: Compare loan interest rate with potential investment returns. Paying down high-interest debt usually provides better guaranteed returns.

Q3: Are there prepayment penalties?
A: Some loans have prepayment penalties - check your loan agreement before making extra payments.

Q4: How does prepayment affect amortization?
A: Prepayments reduce principal faster, causing more of each subsequent payment to go toward principal rather than interest.

Q5: Is it better to shorten term or reduce payment?
A: Shortening term saves more interest, but reducing payment increases cash flow. Choose based on your financial goals.