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Loan Payment Formula:
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The loan payment formula (PMT) calculates the fixed monthly payment required to pay off a loan over a specified term, including both principal and interest. It's used for mortgages, car loans, personal loans, and other installment loans.
The calculator uses the standard loan payment formula:
Where:
Explanation: The formula accounts for compound interest over the life of the loan, calculating a fixed payment that will pay off both principal and interest by the end of the term.
Details: Each payment consists of both interest and principal. Early in the loan, most of the payment goes toward interest. As the loan matures, more of each payment is applied to the principal.
Tips: Enter the total loan amount, annual interest rate (as a percentage), and loan term in years. The calculator will show the fixed monthly payment required to pay off the loan in full by the end of the term.
Q1: Does this include taxes and insurance?
A: No, this calculates only principal and interest. For mortgages, you'll need to add property taxes, insurance, and possibly PMI separately.
Q2: How does a higher interest rate affect payments?
A: Higher rates increase monthly payments significantly. A 1% rate increase on a $300,000 mortgage adds about $180 to the monthly payment.
Q3: What's better - shorter term or lower payment?
A: Shorter terms mean higher payments but less total interest paid. Longer terms reduce monthly payments but increase total interest costs.
Q4: Can I pay extra to reduce the term?
A: Yes, additional principal payments reduce total interest and can shorten the loan term. Check for prepayment penalties first.
Q5: How accurate is this calculator?
A: It provides standard amortized loan payments. Some loans may have different structures (balloon payments, adjustable rates, etc.).