How To Calculate An Annual Payment On A Loan

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Taking out a loan requires an understanding of not only the rate at which you will have to pay back the principal of the loan (the amount that you borrow), but also the rate at which you will be charged interest on that loan. Calculating annual interest paid on a loan can you help determine if you can afford a certain repayment schedule or help you decide between available loan options to find the best one for your current situation. It will also ensure that you’re not surprised when the bill comes in the mail. Follow these simple steps to calculate your annual loan payment.

Table of Contents

What is interest?

When you take out a loan, whether it’s a car loan, home loan or amount on a credit card, you’ll have to pay back both the amount you borrowed and interest on top of it. But what do we mean by that?

Well, essentially, interest is a fee you pay for using someone else’s (usually the bank’s) money. It’s how lenders make profit from giving out loans – after all, they’re not in it out of the goodness of their hearts.

Factors that affect how much interest you pay

You’ll need to know a few basic facts about your loan before calculating how much interest you’ll pay. All of these things should be freely available to you before you take on the loan – you’ll find them on Mozo’s loan comparison pages – and it’s a good idea to know them all, even if you’re not trying to calculate interest.

How do you calculate a loan payment?

The first step to calculating your monthly payment actually involves no math at all — it’s identifying your loan type, which will determine your loan payment schedule.

  • Yes, before you start digging into the numbers, it’s important to first know what kind of loan you’re getting — an interest-only loan or amortized loan. Once you know, you’ll then be able to figure out the types of loan payment calculations you’ll need to make.

Calculating Periodic Payments On A Loan

Understand the reason to calculate periodic payments on a loan. Often, lenders require that you make monthly or quarterly payments. Therefore, it is more useful to know what the monthly or quarterly payment is, rather than simply the annual payment. Fortunately, the same formula is used, with some minor revisions.

  • For the sake of this example, assume the new loan is the same as previously-discussed one, with the only change being you are now required to make monthly payments for the two year period.

Tips

  • The above calculations work equally well when expressed in other currencies.
  • Payments will not be accurately estimable on an adjustable-rate loan, as the interest rate will fluctuate along with the market.
How To Calculate An Annual Payment On A Loan

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