Calculating Interest Rates

Monthly Loan Payment:

$0.00

Total Interest Paid:

$0.00

Total Amount Paid:

$0.00

Understanding Your Loan Payment

Taking out a loan can be a significant financial decision, whether it's for a car, a personal expense, or another large purchase. Understanding how your monthly payments are calculated is crucial for budgeting and financial planning. This calculator helps you estimate your monthly loan payment based on the principal amount, annual interest rate, and the loan term in years.

How the Calculation Works

The monthly loan payment is typically calculated using an amortization formula. This formula ensures that each payment covers both a portion of the principal amount borrowed and the interest accrued over the loan's life. Here's a breakdown:

• Principal Amount: This is the initial amount of money you borrow.
• Annual Interest Rate: This is the yearly cost of borrowing money, expressed as a percentage. For calculation purposes, it's converted to a monthly rate by dividing by 12.
• Loan Term (in Years): This is the total duration of the loan. For the calculation, this is converted to the total number of months by multiplying by 12.

The standard formula for calculating the monthly payment (M) is:

M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]

Where:

• P = Principal loan amount
• i = Monthly interest rate (Annual Interest Rate / 12)
• n = Total number of payments (Loan Term in Years * 12)

Example Calculation

Let's say you're taking out a personal loan with the following details:

• Principal Loan Amount: $15,000
• Annual Interest Rate: 7.5%
• Loan Term: 3 Years

First, we convert the annual interest rate to a monthly interest rate:

Monthly Interest Rate (i) = 7.5% / 12 = 0.075 / 12 = 0.00625

Next, we convert the loan term to the total number of monthly payments:

Total Number of Payments (n) = 3 Years * 12 Months/Year = 36

Now, we plug these values into the formula:

M = 15000 [ 0.00625(1 + 0.00625)^36 ] / [ (1 + 0.00625)^36 – 1]

After calculation, the estimated monthly payment would be approximately $465.93.

Over the life of the loan, the total amount paid would be $465.93 * 36 = $16,773.48. The total interest paid would be $16,773.48 – $15,000 = $1,773.48.

Use this calculator to get your own personalized loan payment estimates!