How Do You Manually Calculate a Monthly Loan Payment?

Learn how to calculate a monthly loan payment on the spot.

When it comes to borrowing money, it can be helpful to know how much the monthly payments will be on the fly. This can allow you to make informed decisions when shopping for items such as large appliances or vehicles, which typically offer monthly payment options.

Things You'll Need

• Pencil
• Paper

Instructions

1. Determine the principal components of the loan. The major pieces of any loan are the amount, the interest and time. The amount is the amount of money to be borrowed, the interest refers to the interest rate charged, and the time will be the amount of months it will take to pay the loan back. As a sample, use $10,000 borrowed at 8 percent APR for 60 months.

2. Divide the APR by 1,200. You want to reflect the interest rate charged as a decimal so you can get the true monthly payment because most loans are not calculated with simple interest, but daily compounding interest. In this sample, the 1,200 represents 12 months. So the first piece of the equation is 8 divided by 1,200, resulting in 0.0066. (This decimal repeats until infinity.) This result will be referred to as the "rate."

3. Add 1 to your rate answer. You are slowly building an equation to manually calculate the monthly payment. So in this equation, adding 1 to the rate would give you a value of 1.0066. This will be referred to as "rate plus one."

4. Raise your rate plus one answer to the 60th power. The 60th power represents the 60-month term of the loan. The equation now reads (1.0066^60.) This garners an answer of 1.4839. Subtract 1 from this answer to garner 0.4839. This will be referred to as the "new rate."

5. Divide your rate by your new rate. The sample equation would read 0.0066 divided by 0.4839. The answer is 0.0136. Consider this answer the "divided rate."

6. Add your rate to the divided rate. This sample equation would then read 0.0066 plus 0.0136. This garners a result of 0.0202 This will be referred to as the "daily interest rate."

7. Multiply the daily interest rate by the amount of money to be borrowed. The equation now reads 0.0202 x $10,000. This results in an answer of a monthly payment of $202. Over the life of the loan, you will pay a total of $12,120 or $2120 in interest.

Tips & Warnings

• The actual equation to figure out a monthly payment with compounding interest is Monthly Payment = Rate + Rate/(1+Rate^Months)-1) x Principal. Solve the problem by simplifying the middle of the equation first before moving to the outer sections.

References

• My Algebra
• 1728: Loan Payment Formula