Understanding Loan Calculations
A loan calculator helps you determine the monthly payments and total cost of a loan based on the principal amount, interest rate, and loan term.
How Loan Payments Work
When you make a loan payment, part of it goes to the principal (the amount you borrowed) and part of it goes to interest (the cost of borrowing):
- Principal Payment: Reduces the balance of your loan
- Interest Payment: The cost charged by the lender for borrowing the money
In the early stages of a loan, a larger portion of each payment goes toward interest. As you continue to make payments, more of each payment goes toward the principal.
Loan Formula
The formula for calculating a fixed monthly loan payment is:
P = (r * PV) / (1 - (1 + r)-n)
Where:
- P = Monthly payment
- r = Monthly interest rate (annual rate divided by 12)
- PV = Present value (loan amount)
- n = Total number of payments (loan term in years * 12)
Factors That Affect Your Loan
- Loan Amount: The more you borrow, the higher your monthly payment will be
- Interest Rate: Higher interest rates result in higher monthly payments and more interest paid over time
- Loan Term: Longer terms typically result in lower monthly payments but more interest paid overall
- Credit Score: Better credit scores often qualify for lower interest rates
Consider making extra payments toward the principal when possible, as this can significantly reduce the total interest paid and shorten the loan term.