How Do You Calculate Monthly Payments on a Loan?

If you don’t have the cash on hand to cover an expense, a loan can come in handy. While there are a variety of loans out there, many of them are installment loans. With an installment loan, you’ll receive a lump sum of money upfront and repay it over time via fixed monthly payments or installments. Speaking of monthly payments, how do you calculate them on a loan? Keep reading to find out.

Why It’s Important to Know Your Monthly Payments

There are several reasons you should understand your monthly loan payments. First and foremost, they can give you an idea of the total cost you’ll pay to borrow money. You may also use this knowledge to potentially lower your costs. If your payments are low and you can afford to put more toward your loan every month and/or pay off your loan early, you may save hundreds or even thousands less in interest.

Ways to Calculate Monthly Loan Payments

When you accept a loan from a lender, you’ll receive the principal, which is the money you originally agreed to pay back, and interest or the charge you’ll pay for the privilege of borrowing money. In most cases, your monthly loan payments will be divided into equal payments over the loan term. Calculating your payments will depend on the type of loan you take out. The most common types of loans include:

• Interest-only loans: While interest-only loans are less common, they do exist. With these loans, you only pay interest in the first few years. This means your principal will stay as is.
• Amortizing loans: Amortizing loans require you to pay toward both the principal and interest over a set period of time. The amount you pay on interest and principal will change over the loan term, but your monthly payment will stay the same.
• Credit card loans: Credit cards are revolving lines of credit. You can use as much or as little as you’d like up to a set credit limit. You’ll only pay interest on the amount you borrow.

Use a Loan Payment Calculator

While you can try to calculate your monthly payments on your own, doing so can get complicated. That’s why using a loan payment calculator is a good idea. All you have to do is plug in your desired loan amount and annual percentage rate or APR, which considers interest and other fees. The calculator will then spit out your estimated monthly loan payments based on the info you provided. You’ll be able to see your loan payment for various loan terms.

The Bottom Line

A loan can help you meet a variety of short-term or long-term financial goals. Before you commit to one, however, make sure you calculate your monthly loan payments. Once you do, you’ll be able to avoid unwanted financial surprises and budget accordingly.

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