How to Calculate a Loan Settlement

Calculating loan settlement shows the amount and number of payments needed.

Loan settlement is the amount of money a person will have to pay and how frequently that person will have to pay in order to pay off a loan. Lending institutions disclose loan settlement information on the loan settlement statement. For example, a borrower has a $30,000 loan. The loan charges 7 percent interest. The lending institution wants the borrower to pay monthly for the next five years.

Instructions

1. Calculate the interest rate per payment period. In our example, the interest rate is 7 percent per year. Since the borrower will pay monthly, divide 7 percent by 12 months, which equals 0.005833333.

2. Multiply the interest rate per period by the total amount the person borrowed on the loan. In the example, 0.005833333 times $30,000 equals $175.

3. Add 1 to the interest rate per month, then raise the sum to the negative power of the number of required payments. In the example, 1 plus 0.005833333 equals 1.005833333. Next, 1.005833333 raised to the power of -60 equals 0.705405038.

4. Subtract the number determined in Step 3 from 1. In the example, 1 minus 0.705405038 equals 0.294594962.

5. Divide the number calculated in Step 2 by the number calculated in Step 4. In the example, $175 divided by 0.294594962 equals $594.04.

6. Break down the terms of the loan. In our example, the borrower must make equal payments of $594.04 each month for the next 60 months, or 5 years.

References

• BusinessDictionary: Loan Settlement Statement
• Oak Road Systems: Loan or Investment Formulas