Loan Payment Formula

A loan payment is required monthly payment for a loan. By definition, loan is the amount of money (or sometimes other goods) given to a borrower in exchange for consistent future payments, which usually consist of principal (original sum of borrowed money), interest and sometimes other additional fees and charges. Therefore, the loan payment can be calculated as payment on an ordinary annuity.

How to Calculate Standard Loan Payment? 

Where P = the loan payment, PV = the present value, r = the rate per loan period, and n = the number of periods.

This formula can only be used in case of a standard loan with a fixed rate. An adjustable rate loan payment can be calculated with this formula, but it should be calculated for each month separately, using new remaining balance and new remaining term.

In this formula, it’s important to make sure that all of the components of the formula refer to the same time period. If we’re calculating monthly loan payment, annual interest rate should be divided by 12 and number of yearly payments should be multiplied by 12.

Example of Standard Loan Payment Calculation

Let’s assume you borrow $10,000 at 5% for 4 years. The payments are made monthly.

The amount of monthly payments is 4 years × 12 months = 48 payments

Monthly interest rate is 5% a year divided by 12 months, which gives us monthly interest rate of 0.4167%.

A common mistake made while computing this formula is not converting percentage to decimal.  In this case the result of addition can’t be 1.04167 or 1.04167%. if you want to run calculations, you need to convert percentages to decimal format. The number in percentage should be divided by 100.

For example, our monthly rate is 0.4167%.

0.4167%  ÷ 100 = 0.004167 

Interest Only Loan Payment

Interest Only Loan is a type of loan in which the borrower for some of the terms pays only the interest. Therefore, the principal balance doesn’t change during interest rate only payment periods. At the end of this term, the borrower chooses between three options: to pay the principal by making amortizing payments or balloon payments, to convert the loan to a conventional mortgage or to renegotiate another interest only loan.

How to Calculate Interest Only Loan Payment?

Calculation of the payment for this type of loan is much easier, since the borrower pays only the interest. Using the previous example where you borrow $10,000 at 5% for 4 years and the payments are made monthly, Interest Only Loan Payment can be calculated as:

Credit Card Payment Formula

Another type of a loan payment is credit card payment. To calculate it we need to know what the credit card minimum payment is. Credit Card Minimum Payment is the least amount of money that has to be on your credit card balance to not be penalized with interest rate increase or a fee. It can be expressed as a percent of the balance or a percent of the balance + monthly finance charge.

How to Calculate Credit Card Payment?

Credit Card Payment is calculated by Multiplying Credit Card Balance by Minimum Payment expressed as a percentage. If the Minimum Payment is expressed as a percent of the balance + monthly finance charge, Credit Card Payment is computed by Multiplying the Percent of the Balance by Credit Card Balance and adding Monthly Finance Charge.

Sometimes your credit card repayment has a monthly finance charge, and the formula changes to become:

Example 1.

• Let’s assume your Minimum Credit Card Payment is 2% of your balance.
• At the end of a month you owe $5,000 on your credit card.

Example 2.

• Let’s assume your Minimum Credit Card Payment is 1% of your balance.
• Monthly Finance Charge is $50.
• At the end of a month you owe $4,000 on your credit card.