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 term. This formula accounts for both principal and interest payments, ensuring the loan is fully amortized over the chosen period.

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula:

Where:

• \( Principal \) — Original loan amount ($)
• \( Rate \) — Monthly interest rate (decimal)
• \( Months \) — Total number of monthly payments

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

3. Importance of Loan Payment Calculation

Details: Accurate loan payment calculation is essential for financial planning, budgeting, and comparing different loan options. It helps borrowers understand their monthly obligations and total cost of borrowing.

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 loan term in months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

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

Q2: What if I want to calculate total interest paid?
A: Multiply the monthly payment by the number of months, then subtract the principal: Total Interest = (Monthly Payment × Months) - Principal.

Q3: Can this calculator handle different payment frequencies?
A: This calculator assumes monthly payments. For other frequencies, adjust the rate and term accordingly.

Q4: What is amortization?
A: Amortization is the process of paying off a loan through regular payments that cover both principal and interest over time.

Q5: How does extra payments affect the loan?
A: Extra payments reduce the principal faster, decreasing total interest paid and potentially shortening the loan term.