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Loan Payment Formula:
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The loan payment formula calculates the fixed periodic payment required to pay off a loan with interest over a specified number of periods. This formula accounts for both principal repayment and interest charges.
The calculator uses the loan payment formula:
Where:
Explanation: This formula calculates the fixed payment amount that covers both interest and principal repayment over the loan term, ensuring the loan is fully paid off by the end of the term.
Details: Accurate loan payment calculation is essential for financial planning, budgeting, and comparing different loan options. It helps borrowers understand their repayment obligations and make informed borrowing decisions.
Tips: Enter the principal amount in dollars, interest rate as a percentage (e.g., 5 for 5%), and the number of payment periods. All values must be positive numbers.
Q1: What's the difference between nominal and effective interest rate?
A: Nominal rate is the stated rate, while effective rate includes compounding effects. This calculator uses the periodic rate based on your payment frequency.
Q2: How does payment frequency affect the calculation?
A: More frequent payments (monthly vs. annually) reduce the total interest paid over the loan term but increase the payment frequency.
Q3: What is amortization?
A: Amortization is the process of gradually paying off a loan through regular payments that cover both principal and interest.
Q4: Can this formula be used for mortgages?
A: Yes, this is the standard formula for calculating fixed-rate mortgage payments, though additional factors like property taxes and insurance may affect the total payment.
Q5: What happens if I make extra payments?
A: Extra payments reduce the principal balance faster, potentially shortening the loan term and reducing total interest paid.