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 components.

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula:

Where:

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

Explanation: The formula accounts for the time value of money, calculating equal payments that will pay off the loan plus interest over the specified term.

3. Importance of Loan Payment Calculation

Details: Calculating accurate loan payments helps borrowers understand their financial commitments, compare loan offers, and budget effectively.

4. Using the Calculator

Tips: Enter the loan 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 rate?
A: Divide the annual percentage rate (APR) by 12 (months) and by 100 (to convert from percentage to decimal).

Q2: Does this include taxes and insurance?
A: No, this calculates only principal and interest. Actual payments may include additional amounts for taxes, insurance, or fees.

Q3: What's the difference between simple and amortized loans?
A: Simple loans have interest calculated only on principal, while amortized loans (like mortgages) have payments that cover both principal and interest.

Q4: 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.

Q5: Can this formula be used for credit cards?
A: Not directly, as credit cards typically have minimum payment formulas that may not fully amortize the balance.