Your loan payment will depend on a few factors. For calculating the payment for an amortized loan, lenders use your loan term, amount, interest, and any additional fees.
Remember that the term of the loan is the total months for full repayment.
Calculating your monthly payment is complex, so it's best to use an amortization calculator to get an accurate breakdown.
The Loan Payment Formula
For those that want to calculate by hand, you'll need to use a formula that divides the loan amount by the discount factor raised to an exponent.
The discount factor formula is:
Loan Payment = [(1 + i) n ] - 1 / [ i (1 + i) n ]
- i is the periodic interest rate
- n is the number of periodic payments
How It Works
To calculate the value of i, you'll have to express your interest in decimal form and divide it by 12 monthly payments per year.
To obtain the value of n, you have to multiply the term of the loan by 12 to obtain the number of monthly payments.
Let's say you took out a loan for 30 years at 6 percent.
The value of i would equal 0.06 divided by 12. The result would be 0.005.
To obtain the value of n, you have to multiply 30 by 12. In this example, the number of periodic payments (n) equals 360.
To determine the loan payment, you'll have to substitute these values in the discount factor formula.
The exact calculation may vary depending on your lender and additional fees. To get familiar with the concept, you can create your table using our amortizing loan calculator.
Doing this can give you valuable insight into how much loan you can afford before you approach a lender. Whether or not you get approved for the loan depends on several qualifying factors, however.