Enter your loan amount, interest rate, and loan term into the calculator to determine your monthly payment.
Amortization Calculation Formula
The following formula is used to calculate the monthly payment for your loan.
Monthly Payment = (P * r) / (1 - (1 + r)^-n)
Variables:
- Monthly Payment is the amount you pay every month ($)
- P is the loan principal amount ($)
- r is the monthly interest rate (%)
- n is the number of payments (months)
To calculate the monthly payment, multiply the loan amount by the monthly interest rate and divide by the result of one minus the value of one plus the monthly interest rate raised to the negative number of payments.
What is Loan Amortization?
Loan amortization refers to the process of paying off a loan through regular payments over a set period. Each payment covers both the interest and principal amount, with the interest portion decreasing over time as the principal is gradually paid off. Understanding loan amortization helps in effective financial planning and budgeting.
How to Calculate Monthly Payment?
The following steps outline how to calculate the monthly payment using the given formula.
- First, determine your loan amount and interest rate.
- Next, convert the annual interest rate to a monthly rate by dividing by 12.
- Determine the total number of payments by multiplying the loan term by 12.
- Use the formula from above: Monthly Payment = (P * r) / (1 – (1 + r)^-n).
- Finally, calculate the monthly payment by plugging in the values.
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
Loan Amount = $200,000
Interest Rate = 5%
Loan Term = 30 years
FAQ
1. What is the principal amount?
The principal amount is the original sum of money borrowed or the amount still owed on a loan, excluding interest.
2. How is the monthly payment determined?
The monthly payment is determined by the loan amount, interest rate, and loan term. It includes both principal and interest payments.
3. Why is understanding amortization important?
Understanding amortization helps in knowing how much of each payment goes towards interest and principal, allowing for better financial planning and loan management.
4. Can this calculator be used for different loan types?
Yes, you can adjust the loan amount, interest rate, and loan term to calculate the monthly payment for various loan types, including mortgages, car loans, and personal loans.
5. Is the calculator accurate?
The calculator provides an estimate of your monthly payment based on the inputs provided. For exact figures, it’s best to consult with your lender or financial advisor.