If you know how to calculate the rate of a loan, you will be able to determine the amount you can afford to borrow for major purchases, such as a car or a house. Calculating the installments of a loan in advance ensures that there are no surprises at a later time and often avoids the buyer's remorse.
Steps
Method 1 of 3: Use a Computer
Step 1. Go online
There are numerous loan calculators and amortization tables that, with the insertion of some numbers, will calculate the installment of your loan:
- Loan amount.
- Loan duration in months or years.
- Interest rate.
Step 2. Use Microsoft Excel or another calculation program to calculate your loan payments
This is especially useful if you use Excel on a regular basis for other data.
- Create a spreadsheet with the following titles and calculation functions: Interest Rate (Interest), Loan Amount, Loan Term in Months (Per), and Monthly Installments (PMT).
- Enter this formula to calculate loan installments: = PMT (B5 / 12, B7, B6)
Method 2 of 3: Manual Loan Installment Calculation
Step 1. If you like playing with numbers, or if you want to check the reliability of the online calculator, manually calculate the loan payment or amortization schedule
- The formula is M = P * (J / (1 - (1 + J) ^ -N)).
- M: monthly payment
- P: principal or loan amount
- J: monthly interest; annual interest divided by 100 and then divided by 12.
- N: number of months for amortization, determined by the duration of the loan in years.
Step 2. Follow the steps below:
Step 3. Calculate 1 + J
M = P * (J / (1 - (1 + J) ^ -N))
Step 4. Take what you find and subtract N
M = P * (J / (1 - (1 + J) ^ -N))
Step 5. Subtract the result from 1
M = P * (J / (1 - (1 + J) ^ -N))
Step 6. Divide the monthly interest (J) by this number
M = P * (J / (1 - (1 + J) ^ -N))
Step 7. Multiply the result by the principal or the loan amount. P * (J / (1 - (1 + J) ^ -N))
Method 3 of 3: Example
Step 1. $ 100,000 30 year loan with 6% annual interest rate P = 100,000J =.005 (6 divided by 100, and then divided by 12) N = 360 (30 years multiplied by 12)
- M = 100,000 * (.005 / (1 - (1 +.005) ^ -360))
- M = 100,000 * (.005 / (1 - (1.005)^ -360))
- M = 100,000 * (.005 / (1 - 0.1660419)
- M = 100,000 * (.005 /.083395)
- M = 100, 000 *.0059955
- M = 599.55
Suggestions
- Excel calculates loan installments based on constant and non-variable payments and interest rates.
- Many lenders, such as Lending Tree, have a loan calculator on their website.
