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4WaystoCalculateLoanPaymentswikiHow

HowtoCalculateLoanPayments
FourMethods:

SampleCalculator

UsinganOnlineCalculator

CalculatingLoanPaymentsManually

UnderstandingHowLoansWork

Ifyouknowhowtocalculatealoanpayment,youcanplanoutyourbudgetso
therearenosurprises.Usinganonlineloancalculatorisrecommended,
simplybecauseofhoweasyitistomakemistakeswhencalculatinglong
formulasonaregularcalculator.

SampleCalculator

LoanPaymentCalculator

Method1of3:UsinganOnlineCalculator

Openanonlineloancalculator.Youcanclickthecalculatorinthe"samples"
sectionatthetopofthispage,thenopenitwithGoogleDrive,ordownloaditto

openwithExceloranotherspreadsheetprogram.Alternatively,visitoneofthefollowing
links:
Bankrate.comandMLCalcarebothsimplecalculatorsthatalsoshowafull
tableofyourpaymentschedule,includingremainingdebt.
CalculatorSoupisusefulforloanswithunusualpaymentorcompounding
intervals.Forexample,Canadianmortgagesaretypicallycompoundedsemi
annually,ortwiceayear.(Thecalculatorsaboveassumetheinterestis
compoundedmonthly,andpaymentsaremademonthly.)
YoucanmakeyourownloancalculatorinExcel,similartothewikiHowsample
above.

Entertheloanamount.Thisisthetotalamountofmoneyborrowed.Ifyouare
calculatingapartiallypaidloan,entertheamountofmoneyyouhavelefttopay.
Thisfieldmaybelabeled"baseamount."

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Entertheinterestrate.Thisisthecurrentannualinterestrateonyourloan,in
percentageform.Forinstance,ifyoupaya6%interestrate,typein6.
Thecompoundingintervaldoesnotmatterhere.Theinterestratespecified
shouldbethenominalannualinterest,evenifinterestiscalculatedmore
frequently.

Entertheloanterm.Thisistheamountoftimeyouplantospendpayingoffthe
loan.Usetheamountoftimespecifiedontheloanconditionstocalculatethe

minimummonthlypaymentrequired.Useashorteramountoftimetocalculateahigher
monthlypaymentthatwouldpayofftheloansooner.
Payingtheloanoffsoonerwillalsomeanlesstotalmoneyspent.
Readthelabelnexttothisfieldtodeterminewhetherthecalculatoruses
monthsoryears.

Enterthestartdate.Thisisusedtocalculatethedatewhenyou'llfinishpayingoff

Hitcalculate.Somecalculatorswillautomaticallyupdatethe"MonthlyPayment"

theloan.

fieldafteryouentertheinformation.Otherswaituntilyouhit"calculate,"thengive

youachartorgraphshowingyourpaymentschedule.
The"Principal"istheamountoftheoriginalloanleft,while"Interest"isthe
remainingadditionalcharge.
Thesecalculatorswilldisplayinformationfora"fullyamortized"loanpayment
schedule,whichmeansyouwillpayexactlythesameamounteachmonth.
Ifyoupaylessthantheamountdisplayed,youwillenduppayingasingleextra
largepaymentattheendoftheloanterm,andyouwillenduppayingmore
moneytotal.

Method2of3:CalculatingLoanPaymentsManually

Writedowntheformula.TheformulatousewhencalculatingloanpaymentsisM
=P*(J/(1(1+J)N)).[1]Followthestepsbelowforadetailedguidetousingthis

formula,orrefertothisquickexplanationofeachvariable:
M=paymentamount
P=principal,meaningtheamountofmoneyborrowed
J=effectiveinterestrate.Notethatthisisusuallynottheannualinterestrate
seebelowforanexplanation.
N=totalnumberofpayments

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Becarefulaboutroundingresultspartwaythrough.Ideally,useagraphing
calculatororcalculatorsoftwaretocalculatetheentireformulainoneline.Ifyou

areusingacalculatorthatcanonlyhandleonestepatatime,orifyouwanttofollowthe
stepsindetailbelow,roundtonofewerthanfoursignificantdigitsbeforemovingonto
thenextstep.Roundingtoashorterdecimalcouldresultinsignificantroundingerrorsin
yourfinalanswer.
Evensimplecalculatorsusuallyhavean"Ans"button.Thisenterstheprevious
answerintothenextcalculation,whichismoreaccuratethancalculatingit
below.
Theexamplesbelowareroundedaftereachstep,butthefinalstepincludesthe
answeryouwouldgetifyoufinishedthecalculationononeline,soyoucan
checkyourwork.

CalculateyoureffectiveinterestJ.Mostloantermsmentionthe"nominalannual
interestrate,"butyouprobablearen'tpayingyourloanoffinannualinstallments.

Dividetheannualinterestrateby100toputitindecimalform,thendivideitbythe
numberofpaymentsyoumakeeachyeartogettheeffectiveinterestrate.
Forexample,iftheannualinterestrateis5%,andyoupayinmonthly
installments(12timesperyear),calculate5/100toget0.05,thencalculateJ=
0.05/12=0.004167.
Inunusualcases,interestratesarecalculatedatadifferentintervalthan
paymentschedule.Mostnotably,Canadianmortgagesarecalculatedtwicea
year,despitetheborrowermakingpaymentstwelvetimesayear.Inthiscase,
youwoulddividetheannualinterestbytwo.

NotethetotalnumberofpaymentsN.Theloantermmayalreadyspecifythis
number,oryoumayneedtocalculateityourself.Forexample,iftheloantermis5

yearsandyou'llbepayingintwelvemonthlyinstallmentseachyear,yourtotalnumberof
paymentswillbeN=5*12=60.

Calculate(1+J)N.Firstadd1+J,thenraisetheanswertothepowerof"N."Make
suretoincludethenegativesigninfrontoftheN.Ifyourcalculatorcan'thandle

negativeexponents,insteadwritethisas1/((1+J)N).[2]
Inourexample,(1+J)N=(1.004167)60=0.7792

CalculateJ/(1(youranswer)).Onasimplecalculator,firstcalculate1the
numberyourcalculatedinthepreviousstep.Next,calculateJdividedbytheresult,

usingtheeffectiveinterestrateyoucalculatedabovefor"J."
Inourexample,J/(1(answer))=0.004167/(10.7792)=0.01887

Findyourmonthlypayment.Todothis,multiplyyourlastresultbytheloan
amountP.Theresultwillbetheexactamountofmoneyyouneedtopayeach

monthinordertopayoffyourloanontime.
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Forexample,ifyouborrowed$30,000,youwouldmultiplyyouranswerfromthe
laststepby30,000.Continuingourexampleabove,0.01887*30000=566.1
dollarspermonth,or$566and10cents.
Thisworksforanycurrency,notjustdollars.
Ifyoucalculatedourexampleallononelineofafancycalculator,youwouldget
amoreaccuratemonthlypayment,verycloseto$566.137,orabout$566and
14centseachmonth.Ifweinsteadpaid$566and10centseachmonthlikewe
calculatedwiththelessaccuratecalculatorabove,wewouldbeslightlyoffby
theendoftheloanterm,andwouldneedtopayafewdollarsextratomakeup
forit(lessthan5inthiscase).

Method3of3:UnderstandingHowLoansWork

Understandfixedrateversusadjustablerateloans.Everyloanfallsintooneof
thesetwocategories.Makesureyouknowwhichappliestoyours:
Afixedrateloanhasanunchanginginterestrate.Themonthlypayment
amountforthesewillneverchange,aslongasyoupaythemontime.
Anadjustablerateloanperiodicallyadjustsitsinterestratetomatchthe
currentstandard,soyoucouldendupowingmoreorlessmoneyiftheinterest
ratechanges.Interestratesareonlyrecalculatedduringthe"adjustment
periods"specifiedonyourloanterm.Ifyoufindoutwhatthecurrentinterest
rateisafewmonthsbeforethenextadjustmentperiodhappens,youcanplan
ahead.

Understandamortization.Amortizationreferstotherateatwhichtheinitial
amountborrowed(the"principal")isreduced.Therearetwocommontypesofloan

paymentschedules:[3]
Fullyamortizedloanpaymentsarecalculatedsoyoucanpaytheexactsame
amounteachmonthfortheentiredurationoftheloan,payingofftheprincipal
andtheinterestwitheachpayment.Thecalculatorsandformulasaboveall
assumeyouwantthiskindofschedule.
Interestonlyloanpaymentplansgiveyoucheaperinitialpaymentsduringthe
specified"interestonly"period,becauseyouareonlypayingofftheinterest,not
theinitial"principal"youborrowed.Aftertheinterestonlyperiodrunsout,your
monthlypaymentswilljumptoasignificantlyhigheramount,becauseyou'llstart
payingofftheprincipalaswellastheinterest.Thiswillcostyoumoremoneyin
thelongrun.

Paymoremoneyearlytosavemoneyinthelongrun.Addinganextrapayment
willreducethetotalamountofmoneytheloanwillcostyouinthelongterm,since

thereislessmoneyforinteresttoaccumulateon.Theearlieryoudothis,themore
moneyyouwillsave.
Ontheothersideofthecoin,payinglessthanthemonthlypaymentyou
calculatedabovewillresultinmoretotalmoneyspentoverthelongterm.Also
notethatsomeloanshaveaminimumrequiredmonthlypayment,andyou
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couldbechargedadditionalfeesifyoufailtomeetthis.

Wecouldreallyuseyourhelp!
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aggressiveness?

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Tips
Youmayfindotherformulasforcalculatingpayments.[4][5]Theseare
equivalentandshouldgivethesameresult.

Warnings
"Adjustablerate"loansormortgages,alsocalled"variablerate"or
"floatingrate,"canhavetheirpaymentamountschangedrasticallyif
interestratesriseorfall.The"adjustmentperiod"ontheseloanstells
youhowoftentheinterestratesarerecalculated.Toseeifyoucould
handletheworstcasescenario,calculatetheloanpaymentsthatwould
resultifyouhitthespecified"cap"ofinterestrates.[6][7]

SourcesandCitations
1. http://www.hughcalc.org/formula.php
2. http://www.purplemath.com/modules/exponent2.htm
3. http://www.mtgprofessor.com/tutorials2/interest
only%20versus%20fullyamortizing.html
4. http://www.mtgprofessor.com/formulas.htm
5. http://www.1728.org/loanform.htm
6. http://www.investopedia.com/articles/pf/05/031605.asp
7. http://www.investopedia.com/university/mortgage/mortgage2.asp

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