Understanding Unsecured Loans and Your Monthly Payment
An unsecured loan is a type of loan that does not require collateral from the borrower. This means the lender does not have a specific asset (like a house or car) to seize if the borrower defaults on the loan. Because of this increased risk for the lender, unsecured loans often come with higher interest rates compared to secured loans. They are typically used for personal expenses, debt consolidation, home improvements, or unexpected emergencies.
How the Monthly Payment is Calculated
The monthly payment for an unsecured loan is calculated using the standard annuity formula. This formula determines a fixed periodic payment that will pay off the loan principal and interest over the loan's term.
The formula is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
M = Your total monthly payment
P = The principal loan amount (the total amount you borrow)
i = Your monthly interest rate. This is calculated by dividing the Annual Interest Rate by 12. For example, a 7.5% annual rate becomes 0.075 / 12 = 0.00625 monthly.
n = The total number of payments over the loan's lifetime. This is calculated by multiplying the Loan Term in years by 12. For a 5-year loan, n = 5 * 12 = 60 payments.
Example Calculation
Let's say you're looking to borrow $15,000 (P) with an annual interest rate of 9.0% and a loan term of 3 years.
P = $15,000
Annual Interest Rate = 9.0%
Loan Term = 3 years
First, we convert the annual interest rate to a monthly rate (i):
i = 9.0% / 12 = 0.09 / 12 = 0.0075
Next, we calculate the total number of payments (n):
So, your estimated monthly payment for this unsecured loan would be approximately $477.02.
Important Considerations
This calculator provides an estimate. Actual loan offers may vary based on your creditworthiness, lender policies, and other factors. Always review the specific terms and conditions of any loan offer carefully before accepting.
function calculateLoanPayment() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var annualInterestRate = parseFloat(document.getElementById("annualInterestRate").value);
var loanTerm = parseFloat(document.getElementById("loanTerm").value);
var resultElement = document.getElementById("result").querySelector("span");
// Clear previous result
resultElement.textContent = "$0.00";
if (isNaN(loanAmount) || loanAmount <= 0 ||
isNaN(annualInterestRate) || annualInterestRate < 0 ||
isNaN(loanTerm) || loanTerm <= 0) {
alert("Please enter valid positive numbers for all fields.");
return;
}
// Calculate monthly interest rate
var monthlyInterestRate = annualInterestRate / 100 / 12;
// Calculate total number of payments
var numberOfPayments = loanTerm * 12;
var monthlyPayment = 0;
if (monthlyInterestRate === 0) {
// Simple division if interest rate is 0
monthlyPayment = loanAmount / numberOfPayments;
} else {
// Standard loan payment formula
monthlyPayment = loanAmount * (monthlyInterestRate * Math.pow(1 + monthlyInterestRate, numberOfPayments)) / (Math.pow(1 + monthlyInterestRate, numberOfPayments) – 1);
}
// Format the result to two decimal places
resultElement.textContent = "$" + monthlyPayment.toFixed(2);
}