1. What is the Payment Formula?

The payment formula calculates the fixed periodic payment required to pay off a loan over a specified number of periods at a given interest rate. It's commonly used for mortgages, car loans, and other installment loans.

2. How Does the Calculator Work?

The calculator uses the payment formula:

Where:

• \( PMT \) — Periodic payment amount (USD)
• \( PV \) — Present value or loan principal (USD)
• \( r \) — Periodic interest rate (decimal)
• \( n \) — Total number of payment periods (unitless)

Explanation: The formula accounts for both principal repayment and interest charges over the life of the loan.

3. Importance of Payment Calculation

Details: Accurate payment calculation helps borrowers understand their financial commitments and lenders assess loan affordability. It's essential for financial planning and budgeting.

4. Using the Calculator

Tips: Enter the loan amount in USD, interest rate as a decimal (e.g., 0.05 for 5%), and number of payment periods. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between annual and monthly rates?
A: For monthly payments, divide the annual rate by 12 and multiply periods by 12. The calculator uses the periodic rate directly.

Q2: Does this work for any payment frequency?
A: Yes, as long as the rate and periods match the frequency (monthly, quarterly, etc.).

Q3: What if I want to calculate the total interest paid?
A: Multiply the payment amount by number of periods and subtract the principal.

Q4: Are there limitations to this formula?
A: It assumes fixed rates and payments. Doesn't account for fees, balloon payments, or variable rates.

Q5: How does extra principal payment affect the loan?
A: Extra payments reduce principal faster, decreasing total interest and potentially shortening the loan term.