1. What is the Loan Payment Formula?

The loan payment formula calculates the fixed monthly payment required to pay off a loan over a specified period. This formula is used for mortgages, car loans, personal loans, and other installment loans with fixed payments.

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)
• \( n \) — Total number of payments (months)

Explanation: This formula calculates the fixed payment that covers both principal and interest, ensuring the loan is paid off exactly at the end of the term.

3. Importance of Payment Calculation

Details: Accurate payment calculation is crucial for budgeting, loan comparison, and financial planning. It helps borrowers understand their monthly obligations and make informed borrowing decisions.

4. Using the Calculator

Tips: Enter the principal amount in dollars, monthly interest rate as a decimal (e.g., 0.005 for 0.5%), and the number of months for the loan term. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How do I convert annual interest rate to monthly?
A: Divide the annual percentage rate by 12 and convert to decimal (e.g., 6% annual = 0.06 ÷ 12 = 0.005 monthly).

Q2: Does this include taxes and insurance?
A: No, this calculates only the principal and interest portion. For mortgages, taxes and insurance are additional.

Q3: What if I make extra payments?
A: Extra payments reduce the principal faster, shortening the loan term and reducing total interest paid.

Q4: How accurate is this calculation?
A: This is the standard formula used by financial institutions for fixed-rate loans. It provides exact payment amounts.

Q5: Can this be used for credit cards?
A: Credit cards typically use minimum payment formulas, which are different from this installment loan formula.