How to Calculate a Loan Payment
Understand the fixed-payment formula used for many installment loans.
Key idea
Understand the fixed-payment formula used for many installment loans.
Formula or method
Worked example
Start with the values in your question, substitute them into the formula, and keep the units consistent. For example, if a rate is given as 15%, use 0.15 when a formula requires a decimal.
Common mistakes
- Mixing percentage points with percentage change.
- Using different units for the same calculation.
- Rounding too early when several steps are involved.
Why the result can differ
Real-world calculations can include assumptions, rounding, fees, tax rules, calendar conventions, or other details. Treat simple calculator results as estimates when the underlying situation is more complex.
Reading the payment formula
The standard fixed-payment formula uses principal, periodic interest rate, and number of payments. A small change in the rate or term can affect both the monthly payment and the total interest, so comparing only the monthly figure can hide important differences.
What amortization means
Amortization spreads repayment across scheduled payments. Each payment contains interest and principal, and the balance falls as principal is repaid. The exact schedule depends on the loan terms and payment frequency.
Scenario testing
Run several scenarios with the same principal and vary only the rate or term. This makes it easier to see which assumption is responsible for a change in the result.