1. What is the Loan Payment Formula?

The loan payment formula calculates the fixed monthly payment required to fully repay a loan over its term, including both principal and interest. This standard formula is used for most fixed-rate loans.

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 months in loan term

Explanation: The formula accounts for compound interest over the life of the loan, calculating the fixed payment needed to pay off the loan completely by the end of the term.

3. Importance of Loan Comparison

Details: Comparing loans side-by-side helps borrowers understand the true cost of different loan options, considering both monthly payments and total interest paid over the life of the loan.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a percentage (e.g., 5.25), and loan term in months for both loans. The calculator will show monthly payments and total repayment amounts for easy comparison.

5. Frequently Asked Questions (FAQ)

Q1: Why compare loans side by side?
A: Comparing loans helps identify the most cost-effective option, considering both monthly affordability and total interest costs.

Q2: What's more important - lower payment or lower total cost?
A: It depends on your financial situation. Lower payments improve cash flow, while lower total cost saves money overall.

Q3: Does this calculator work for adjustable-rate loans?
A: No, this calculates fixed payments for fixed-rate loans only. ARM payments would change when rates adjust.

Q4: Are there fees not included in this calculation?
A: Yes, this doesn't account for origination fees, closing costs, or other loan fees that affect total cost.

Q5: 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 cost.