When you take out a loan, your lender will calculate the payment that you will need to make each month to pay off your loan over a set period of time. Each monthly payment goes partly toward paying off the interest that accrues on the loan and partly toward paying down the principal you owe. Over the term of the loan, more of each monthly payment will go toward paying down the principal. In order to calculate the monthly payment for your loan from a loan repayment formula, you need to know how much money was borrowed, the interest rate on the loan and how many monthly payments will be made on the loan to pay it off.
Step 1
Calculate the monthly interest rate on your loan by dividing the annual interest rate by 12. For example, if the annual interest rate equals 9 percent, the monthly interest rate would be 0.75 percent.
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Step 2
Convert the monthly interest rate from a percentage to a decimal by dividing by 100. In this example, divide 0.75 by 100 to get 0.0075.
Step 3
Multiply the number of years in the term of the loan by 12 to calculate the number of payments you will make over the life of the loan. For example, if you are repaying the loan over five years, you would multiply 5 by 12 to get 60.
Step 4
Add 1 to the monthly interest rate expressed as a decimal. In this example, add 1 to 0.0075 to get 1.0075.
Step 5
Use exponents to raise the result from Step 4 to the negative Pth power, where P equals the total number of monthly payments you will make on the loan. In this example, raise 1.0075 to the negative 60th power to get 0.638699699.
Step 6
Subtract the result from Step 5 from 1. In this example, subtract 0.638699699 from 1 to get 0.361300301.
Step 7
Multiply the amount you borrowed by the monthly interest rate expressed as a decimal. In this example, if you borrowed $30,000, multiply 30,000 by 0.0075 to get 225.
Step 8
Divide the result from Step 7 by the result from Step 6 to calculate the monthly payment on your loan. To conclude this example, divide 225 by 0.361300301 and find that your monthly payment would be $622.75.
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