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Payment Formula:
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The payment formula calculates the fixed periodic payment required to pay off a loan over a specified number of periods, including both principal and interest components. It's commonly used for mortgages, car loans, and other installment loans.
The calculator uses the payment formula:
Where:
Explanation: The formula calculates the fixed payment amount that will pay off the loan exactly over the specified number of periods, accounting for both principal repayment and interest charges.
Details: Accurate payment calculation is crucial for financial planning, budgeting, and understanding the true cost of borrowing. It helps borrowers compare different loan options and ensure they can afford the monthly payments.
Tips: Enter the principal amount in currency, interest rate as a decimal (e.g., 0.05 for 5%), and the number of payment periods. All values must be positive numbers.
Q1: What's the difference between annual and periodic interest rate?
A: The formula requires the periodic interest rate. For monthly payments, divide the annual rate by 12. For quarterly payments, divide by 4.
Q2: Does this formula account for additional fees?
A: No, this formula calculates only the principal and interest components. Additional fees like origination fees or insurance should be considered separately.
Q3: What if the interest rate is 0%?
A: When interest rate is 0%, the payment is simply the principal divided by the number of periods.
Q4: Can this formula be used for credit card payments?
A: This formula is designed for fixed installment loans. Credit cards typically use different calculation methods with minimum payment requirements.
Q5: How does extra payments affect the calculation?
A: Extra payments reduce the principal faster, which decreases the total interest paid and may shorten the loan term, but they're not accounted for in this basic calculation.