Loan Repayment Formula

If you find yourself in a financially tight spot, borrowing money can help you through the situation, but it’s important to note that this isn’t a long-term solution. And unless you pay off your loan, you’ll find yourself stuck in a vicious cycle of taking out loans to pay off previous loans or sitting by as their interest rates spike (learn how to calculate interest on loan per month here), making it even harder for you to be debt-free. What is a payday loan? Learn the payday loan definition here.

Nevertheless, there’s a fairly simple way to avoid your financial crisis escalating, which is learning how to calculate interest on a loan so that you can be aware of its cost and sure of your ability to fulfil your repayments in the future. Therefore, allow us to illustrate the loan repayment formula. Learn what is a loan here.

The Know-How of the Loan Repayment Formula

What Type Is Your Loan?

Ask yourself: “what is this loan’s type?” Is it an amortizing loan or an interest-only loan? With the former, both interest and principal are paid simultaneously over the loan terms. Learn to pay off loans fast here. The catch is if you pay early, that doesn’t help reduce the principal balance sooner. Learn what is defaulting on loans here.

As for interest-only loans, you only have to pay interest during the first years of the loan unconditional approval process, and you don’t have to pay anything on the principal. This entails that you have to pay less every month, compared to the amortizing loan. Adversely, you’re going to have to procure the full principal at a certain point in the future. If you need a loan been refused everywhere, apply today with Perfect Payday.

What Is the Suitable Formula for Your Loan Type?

how to calculate interest on a loan

Interest-Only Loan

This formula is a fairly straight-forward one for calculating interest:

Loan Payment (P) = Loan Balance (B) x (Annual Interest Rate/12)

Amortizing Loan

The formula below requires a little more than three brain cells, as you’ll see:

Number of Payment Installments (n) = Payments per year x number of years

Periodic Interest Rate (r) = Annual Rate (in decimal figure) / Number of Payment Installments

Discount Factor (D) = {[(1 + r)n] – 1} / [r(1 + r)n]

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

There’s another formula (or a way to put it) for the amortizing loan, and it looks like this:

Total Repayment = P * (r/n) * (1 + r/n)t*n / [(1 + r/n)t*n – 1]

Total Repayment = Principal Repayment + Interest Payment

Since these formulas are quite complex, we decided to arrange them into steps:

  1. Write down the current outstanding amount of the loan (P).
  2. Write down the interest rate (r).
  3. Write down the loan tenure (t), which is the number of years. What are loans with a paid default? Learn about them here.
  4. Write down the compounding frequency per year for the loan (n).
  5. Calculate the loan’s principal repayment using the outstanding loan amount, rate of interest, loan tenure, and the compounding frequency per year.
  6. Add the principal repayment to the interest payment to get the total repayment. We define secured loan here.

Use an Online Loan Calculator

loan payment formula

Suppose you belong to the not-so-exclusive club of people who are entirely mortified by math. Learn about loans for 17 year olds here. In that case, you might benefit from using an online calculator, such as this common bank calculator. All you need to do is log in the numbers in the right slots. Learn what is personal loans here.

How to Calculate a Loan: Tips and Tricks

how to work out loan repayments

  • Interest-only and amortized loans aren’t the only two types, as there are graduated payment, negatively amortized, option, and balloon loans. Consequently, calculating loans or interest varies from one type to the other.
  • Though the formula may change according to those types, it won’t change according to what you’re using the loan to pay off.
  • The original loan amount is also known as Present Value or PV.
  • The rate per period should be consistent with the number of periods. To illustrate, if the loan payments are monthly, you should adjust the rate per period to the monthly rate. Also, the number of periods should be indicative of the number of months on loan.
  • Create an amortization table, and divide it into five columns: payment, amount, interest, principal, and balance.
  • Using an excel sheet to track your payments can be helpful, especially with excel’s built-in functions for amortization formulas. All you have to do is find the function that corresponds to the formula you’re using. For example, the PMT function’s formula looks like this: =PMT(rate,periods,-amount).

Conclusion

All in all, we hope this article has been of help on how to work out loan repayments. Learn what do I need to apply for a personal loan here. If you can determine the type of loan, whether it’s an interest-only loan, amortizing loan, or something completely different, you can use the corresponding loan repayment formula to your loan type and calculate the loan payment. Can you get multiple payday loans at once? Read more about multiple payday loans here.

However, if these formulas intimidate you, you can always revert to excel functions and online calculators, where all you need to do is log in the right numbers in each slot to get accurate results. Knowing a loan’s cost can help you wisely choose the right one for you, keep up with your repayments, and be more financially responsible, overall. Learn how long to pay off my loan here.

About the Author

Lucy has over a decade of experience in finance. She is currently the content curator here at Perfect Payday.

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