Easy Steps on How to Calculate Loan Payments

Easy Steps on How to Calculate Loan Payments

Fri, Jan 8, 2021 10:05 PM

Auto Insurance

Until the first loan payment is due, making a major purchase, consolidating debts, or covering emergency costs with the assistance of funding feels fantastic at the moment. Suddenly, when you have to factor a new bill into the budget, all the feeling of financial flexibility goes out the window.

That's why, before you take out a loan, it is important to find out what that payment would be. It's nice to have at least a basic understanding of how your loan repayment would be measured, whether you're a math whiz or have slept through Basic Algebra. Doing so would mean that, on a month-to-month basis, you do not take out a loan you will not be able to afford.

Phase 1: Be mindful of your loan.

It's important to first know what kind of loan you're having, an interest-only loan or amortizing loan before you start crunching the numbers.

You'd only pay interest for the first couple of years on an interest-only loan, and nothing on the principal. On the other hand, repayments for amortizing loans include both interest and principal over a fixed period of time, the term for example.

Phase 2: For your loan type, consider the monthly payment formula.

Based on your loan type, the next move is to plug numbers into this loan payment formula.

For monthly amortizing loans: 

 Loan Payment (P) = Quantity (A) / Discount Factor (D)

You'll need to find the numbers for these values to find the equation.

  • A = Total loan amount

  • D = {[(1 + r)n] - 1} / [r(1 + r)n]

  • Periodic Interest Rate (r) = Annual rate (converted to decimal figure) divided by number of payment periods

  • Number of Periodic Payments (n) = Payments per year multiplied by number of years

  • Let's assume you get a $10,000 auto loan for 7 years at 3 percent. It was going to shake out like this:

  • n = 84 (12 monthly payments per year x 7 years)

  • r = 0.0025 (a 3% rate converted to 0.03, divided by 12 payments per year)

  • D = 75.6813 {[(1+0.0025)84] - 1} / [0.0025(1+0.0025)84]

  • P = $132.13 (10,000 / 75.6813)

In this instance, $132.13 will be your monthly loan payment for your vehicle.

 

Also Read : Factors That Affect Your Auto Loan

 

Loan Payment = Loan Balance x (annual interest rate/12)

Your monthly interest-only payment for the loan above will be $25 in this situation.

Based on the monthly payment amount, understanding these calculations will also help you determine which form of loan to look for. If you are on a tight budget, for the time being, an interest-only loan would have a lower monthly payment, but at some point, you will owe the entire principal sum. Before agreeing on your loan, be sure to speak to your lender about the pros and cons.

 

loan calculator

 

Phase 3: Plugin an online calculator with the numbers.

You can always use an online calculator in the event that phase two has made you break out in stress sweats. You just need to make sure that the correct numbers are put into the right positions. This Google spreadsheet for measuring amortizing loans is offered by The Balance.

Get a loan that lets you handle your payments every month.

It's important that you have a game plan to pay off your loan now that you know how to measure your monthly figure. The easiest way to save money is to pay in advance on your loan (provided there are no prepayment penalties). But doing that can be frightening. What if they end up with unexpected costs? Like car repairs or visits to the vet?

 

 

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