How To Calculate Loan Payments

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If you know how to calculate a loan payment, you can plan out your budget so there are no surprises. Using an online loan calculator is recommended, simply because of how easy it is to make mistakes when calculating long formulas on a regular calculator. It is critical to include taxes and insurance when calculating a mortgage payment as this will be required by most lenders and banks.

Table of Contents

What Are Loan Payment Calculations?

The type of calculation you use will vary based on the type of loan. Here are three helpful calculations to know about when considering borrowing money:

  • Interest-only loans: With interest-only loans, you don’t pay down any of the principal in the early years—only interest.
  • Amortizing loans: On the other hand, amortizing loans involve paying toward both principal and interest over a set period of time, such as with a five-year auto loan.2
  • Credit card loans: When using a credit card, you’re given a line of credit that acts as a reusable loan so long as you pay it off in time. If you’re late on making monthly payments and begin to carry a balance, you’ll likely be charged 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 Loan Payments Manually

Be careful about rounding results partway through. Ideally, use a graphing calculator or calculator software to calculate the entire formula in one line. If you are using a calculator that can only handle one step at a time, or if you want to follow the steps in detail below, round to no fewer than four significant digits before moving on to the next step. Rounding to a shorter decimal could result in significant rounding errors in your final answer.

Even simple calculators usually have an “Ans” button. This enters the previous answer into the next calculation, which is more accurate than calculating it below.
The examples below are rounded after each step, but the final step includes the answer you would get if you finished the calculation on one line, so you can check your work.

Tips

You may find other formulas for calculating payments. These are equivalent and should give the same result.

Warnings

  • Your actual mortgage payment will be more than the amount you have calculated which represents only P&I (principal and interest). To arrive at your loan payment, you must add an escrow amount which typically includes T&I (taxes and insurance—property taxes and homeowner’s insurance plus mortgage insurance, if it is required by your lender). The use of the escrow account is usually imposed by the mortgage lender and is usually non-negotiable.
  • “Adjustable rate” loans or mortgages, also called “variable rate” or “floating rate,” can have their payment amounts change drastically if interest rates rise or fall. The “adjustment period” on these loans tells you how often the interest rates are recalculated. To see if you could handle the worst-case scenario, calculate the loan payments that would result if you hit the specified “cap” of interest rates.
How To Calculate Loan Payments

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