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How to Calculate Loan Payments in 3 Easy Steps

Making a big purchase, consolidating debt, or covering emergency expenses with the help of financing feels great in the moment — until that first loan payment is due. Suddenly, all that feeling of financial flexibility goes out the window as you have to factor a new bill into your budget. 

That’s why it’s important to figure out what that payment will be before you take out a loan. Whether you’re a math whiz or slept through Algebra I, it’s good to have at least a basic idea of how your loan repayment will be calculated. Doing so will ensure that you don’t take out a loan you won’t be able to afford on a month-to-month basis. 

 

Step 1: Know your loan.

 

Before you start crunching the numbers, it’s important to first know what kind of loan you’re getting — an interest-only loan or amortizing loan.

With an interest-only loan, you would only pay interest for the first few years, and nothing on the principal. Repayments on amortizing loans, on the other hand, include both the interest and principal over a set length of time (i.e. the term). 

 

Step 2: Understand the monthly payment formula for your loan type.

 

The next step is plugging numbers into this loan payment formula based on your loan type. 

For amortizing loans, the monthly payment formula is:

Loan Payment (P) = Amount (A) / Discount Factor (D)

Stick with us here, as this one gets a little hairy. To solve the equation, you’ll need to find the numbers for these values:

  • A = Total loan amount
  • D = {[(1 + r)n] - 1} / [r(1 + r)n]
  • Periodic Interest Rate (r) = Annual rate (converted to decimal figure) divided by number of payment periods
  • Number of Periodic Payments (n) = Payments per year multiplied by number of years

Here’s an example: let’s say you get an auto loan for $10,000 at 3% for 7 years. It would shake out as this:

  • n = 84 (12 monthly payments per year x 7 years)
  • r = 0.0025 (a 3% rate converted to 0.03, divided by 12 payments per year)
  • D = 75.6813 {[(1+0.0025)84] - 1} / [0.0025(1+0.0025)84]
  • P = $132.13 (10,000 / 75.6813)

In this case, your monthly loan payment for your car would be $132.13.

If you have an interest-only loan, calculating loan payments is a lot easier. The formula is:

Loan Payment = Loan Balance x (annual interest rate/12)

In this case, your monthly interest-only payment for the loan above would be $25.

Knowing these calculations can also help you decide which kind of loan to look for based on the monthly payment amount. An interest-only loan will have a lower monthly payment if you’re on a tight budget for the time being, but you will owe the full principal amount at some point. Be sure to talk to your lender about the pros and cons before deciding on your loan.

Step 3: Plug the numbers into an online calculator.

 

In case step two made you break out in stress sweats, you can always use an online calculator. You just need to make sure you’re plugging the right numbers into the right spots. The Balance offers this Google spreadsheet for calculating amortizing loans. This one from Credit Karma is good too.

To calculate interest-only loan payments, try this one from Mortgage Calculator.

 

Get a loan that helps you manage your monthly payments.

Now that you know how to calculate your monthly number, it’s crucial you have a game plan for paying off your loan. Paying ahead on your loan is the best way to save on interest (provided there are no prepayment penalties). But it can be scary to do that. What if unexpected costs come up? Like car repairs or vet visits? 

Kasasa Loans® is the only loan available that lets you pay ahead and access those funds if you need them later, a feature called a Take-Back™. They also make managing repayments easy with a mobile-ready, personalized dashboard. Ask your local, community financial institution if they offer Kasasa Loans. And if you can’t find them in your area, let us know where we should offer them here!

Tags: Personal Finance, Auto Loans