How to calculate installment loan payments formula

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Upgrade Now! Contact us for bulk calculator discounts. Select additional packages to add to your calculator. Anyone who uses your calculator must enter an email address or phone number. If you stop borrowing money on a revolving credit account and resolve to pay it off through fixed payments over a certain amount of time, it will effectively function like an installment loan.

Generally, a lender will tell you how much you owe each month, but if you want to verify this number or you have lent someone money and want to tell them how much to pay you each month, you can use a standard installment loan formula to determine the monthly payment for the installment loan. Assuming you have an installment loan where you know the principal , or initial amount borrowed, and the interest rate and the number of months to pay off the loan, you can use the installment payment formula to figure out how much you must pay each month.

If you only have an annual interest rate, as is published for many loans, divide it by 12 to find the monthly interest rate, since there are 12 months in a year. You can compute the formula using a physical or online calculator or with a spreadsheet program. Note that the formula doesn't work for interest-free loans since it will result in dividing by zero. For a no-interest loan, you can simply divide the principal amount by the total number of months to pay off the loan and pay that amount each month.

Of course, before you take out a personal loan, it's important to know what that new payment will be, and yes, what you'll have to do to pay your debt back. Whether you're a math whiz or you slept through Algebra I, it's good to have at least a basic idea of how your repayment options are calculated.

Doing so will ensure that you borrow what you can afford on a month-to-month basis without surprises or penny-scrounging moments. So let's crunch numbers and dive into the finances of your repayment options to be sure you know what you're borrowing. Don't worry - we're not just going to give you a formula and wish you well. Ahead, we'll break down the steps you need to learn how to calculate your loan's monthly payment with confidence.

The first step to calculating your monthly payment actually involves no math at all - it's identifying your loan type, which will determine your loan payment schedule.

Are you taking out an interest-only loan or an amortized loan? Once you know, you'll then be able to figure out the types of loan payment calculations you'll need to make.

With interest-only loan options, you only pay interest for the first few years, and nothing on the principal balance - the loan itself. While this does mean a smaller monthly payment, eventually you'll be required to pay off the full loan in a lump sum or with a higher monthly payment. Most people choose these types of loan options for their mortgage to buy a more expensive property, have more cash flexibility, and to keep overall costs low if finances are tight.

The other kind of loan is an amortized loan. These loan options include both the interest and principal balance over a set length of time i. In other words, an amortized loan term requires the borrower to make scheduled, periodic payments an amortization schedule that are applied to both the principal and the interest. Any extra payments made on this loan will go toward the principal balance. Good examples of an amortized loan are an auto loan, a personal loan, a student loan, and a traditional fixed-rate mortgage.

Now that you have identified the type of loan you have, the second step is plugging numbers into a loan payment formula based on your loan type. If you have an amortized loan , calculating your loan payment can get a little hairy and potentially bring back not-so-fond memories of high school math, but stick with us and we'll help you with the numbers.

To solve the equation, you'll need to find the numbers for these values:. If you have an interest-only loan , calculating the monthly payment is exponentially easier if you'll pardon the expression.