How Does a Loan Calculator Work?

What a Loan Calculator Does

A loan calculator is a wonderful online device that allows users to determine the amount of a prospective loan payment based on some variables. For example, if you need a mortgage loan of $100,000 with a 30-year repayment and should receive an interest rate of 6.5 percent, your monthly principal and interest (P&I) payment should be $632.07.

What Information Do You Need?

You need three pieces of information to use a loan calculator: (1) a projected loan amount (i.e., how much money do you need?); (2) one or more prospective repayment terms (i.e., how long do you think you need to repay your loan?); and (3) one or more potential interest rates. Based on market conditions, your credit profile and why you want the loan, you might have a variety of interest rates you can use.

How Do I Make the Loan Calculator Work?

After you have an idea of the loan amount, repayment term and interest rate, the rest is easy. Most online loan calculators will provide areas for you to enter some combination of this information.
For example, you believe you'll need $20,000 for your prospective new auto purchase, you'd like to repay the loan over five years and you project that you'll receive an interest rate of 7.0 percent.
Just enter these numbers into the appropriate areas in the calculator. You'll find that your projected monthly loan payment is $396.02.

How Many Combinations Can be Entered?

You can change one, two or all three variables as many times as you wish. The loan calculator will continue to calculate monthly payment amounts as many times as you enter different numbers. You can, therefore, create your preferred loan terms before you go shopping for that new home, car or other item.

Will I Find Different Formats for Loan Calculators?

While the three variables will almost always appear in a loan calculator, you might find other examples that permit or require one or more additional numbers. For example, some calculators ask you how many payment periods per year you desire. Another might ask you the amount of a down payment you want to make. Some mortgage loan calculators may even ask you to enter potential property tax and/or homeowner's insurance cost. This allows the calculator to project a complete monthly mortgage payment including principal, interest, taxes, and insurance (PITI).

Resources

• More Information on Loan Calculators