What Is the Formula for a Monthly Loan Payment?

definition and Examples of Monthly Loan Payments

When you receive a loan from a lender, you receive an sum called the principal, and the lender tacks on interest. You pay back the loanword over a rig numeral of months or years, and the matter to makes the entire amount of money you owe larger. Your monthly loanword payments will typically be broken into equal payments over the term of the lend.

How you calculate your payments depends on the type of loan. here are three types of loans you ‘ll run into the most, each of which is calculated differently :

  • Interest-only loans: You don’t pay down any principal in the early years—only interest.
  • Amortizing loans: You’re paying toward both principal and interest over a set period. For instance, a five-year auto loan might begin with 75% of your monthly payments focused on paying off interest, and 25% paying toward the principal amount. The amount you pay on interest and principal changes over the loan term, but your monthly payment amount does not.
  • Credit card loans: A credit card gives you a line of credit that acts as a reusable loan as long as you pay it off in time. If you’re late making monthly payments and carry your balance to the next month, you’ll likely be charged interest.

How Do You Calculate monthly Loan Payments ?

Since the payments on different types of loans focus on unlike balances, there are classify ways to calculate your monthly payments. here ‘s how to calculate the three types discussed previously .

Amortized Loan Payment Formula

Calculate your monthly payment ( P ) using your principal poise or total loanword measure ( a ), periodic pastime rate ( r ), which is your annual rate divided by the count of payment periods, and your sum count of payment periods ( n ) :

Amortization formula

Interest-Only Loan Payment Formula

Calculating payments for an interest-only loan is easier. First, divide the annual interest rate ( r ) by the number of payments per class ( n ), then multiply it by the measure you borrow ( a ) :

Interest omnly formula

Credit Card Payment Calculations

credit cards besides use fairly simpleton mathematics, but determining your remainder takes more effort because it constantly fluctuates, and lenders charge different rates. They typically use a convention to calculate your minimal monthly payment based on your entire libra. For exemplar, your card issuer might require that you pay at least $ 25 or 1 % of your outstanding libra each month, whichever is greater .

In that case, the formula you ‘d use would be :

Simple Interest Formula

How Do the Loan Payment Calculations Work ?

To demonstrate the dispute in monthly payments, here are some working examples to help you get started.

amortization Payments

Suppose you were to borrow $ 100,000 at 6 % for 30 years, to be repaid monthly. To calculate the monthly payment, convert percentages to decimal format, then follow the formula :

  • a: $100,000, the amount of the loan
  • r: 0.005 (6% annual rate—expressed as 0.06—divided by 12 monthly payments per year)
  • n: 360 (12 monthly payments per year times 30 years)

here ‘s how the mathematics works out :

100,000 ÷ { [ ( 1 + 0.005 ) 360 ] – 1 } ÷ [ 0.005 ( 1 + 0.005 ) 360 ] = 599.55

The monthly requital is $ 599.55. If you ‘re uncertain, you can check your mathematics with an on-line loan calculator .

Interest-Only Loan Payments

Using the former loanword case of $ 100,000 at 6 %, your calculation would look like this :

  • a: $100,000, the amount of the loan
  • r: 0.06 (6% expressed as 0.06)
  • n: 12 (based on monthly payments)

here ‘s the mathematics :

Using the second method, it would look like this :

 ( 100,000 * 0.06 ) / 12 = 500

You can check your mathematics with an interest-only calculator if you ‘re not certain you did it correct.

Credit Card Payments

If you owe $ 7,000 on your credit card, and your minimal payment is calculated as 1 % of your balance, hera ‘s how it would look :

$7,000 * 0.01 = $70

This amount does not include any deep fees or other penalties you might owe. If you ‘re uncertain, you can check your mathematics with a credit card payment calculator .

Because your credit card charges pastime monthly, your balance changes every month. That affects how much your minimum monthly payment will be. In many cases, the minimal monthly payment on a high balance will not be enough to cover the accrued interest .

It ’ s good practice to pay more than the minimum due each month, but the minimum is the sum you must pay to avoid late charges and other penalties. For example, if the card in the previous model with a $ 7,000 poise has a 19.99 % annual share rate ( APR ), you would calculate your monthly pastime charges using this formula, where ( B ) is monthly remainder and ( I ) is your new monthly libra :

APR Formula
here ‘s how it works for your new credit card balance :

$7,000 ( 19.99% ÷ 12) = $,7000 ( .1999 ÷ 12) = $7,000 ( 0.0166 ) = $116.20

then, add the interest to your balance and calculate your minimum requital :

$7,116.20 * .01 = $71.16

As you can see, the sake charges exceed the minimal monthly requital, so the balance would continue to grow tied if you make the minimum payment each calendar month.

What It Means for Consumers

Calculating your monthly payments can help you figure out whether you can afford to use a lend or credit menu to finance a purchase. It helps to take the time to consider how the loan payments and concern lend to your monthly bills. once you calculate your payments, add them to your monthly expenses and see whether it reduces your ability to pay necessary and exist expenses .

If you need the loan to finance a necessity detail, prioritize your debts to try and pay the ones that cost you the most arsenic early as potential. ampere long as there ‘s no prepayment penalty, you can save money by paying supernumerary each month or making big lump-sum payments .

It helps to talk to your lender before you begin making supernumerary or lump-sum payments. Different lenders might increase or decrease your monthly payments if you change your payment sum. Knowing in improvement can save you some headaches down the road .

Key Takeaways

  • By using loan payment calculations, you can figure out whether you can realistically afford to borrow money.
  • Factors such as your income and monthly expenses will aid you in deciding whether taking a loan is a good idea.
  • With interest-only loans and amortizing loans, you can solve for what your monthly payments would look like.
  • Paying off your loan as quickly as possible can minimize the amount of interest you’ll pay on the borrowed money.

frequently Asked Questions ( FAQs )

What are semi-monthly payments?

Semi-monthly payments are those that occur doubly per calendar month .

How do you make monthly payments on Amazon?

If an detail is eligible for monthly payments on Amazon, you simply need to select monthly payments at check. The payments will be automatically deducted from your account ‘s basal credit batting order.

How do you make monthly payments to the IRS?

If you do n’t think you ‘ll be able to file your taxes and pay your counterweight on time, you can request a payment plan with the Internal Revenue Service on-line .

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Category : Finance

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