How can you calculate monthly payments for a fixed loan?


Quick Answer

Monthly payments for a fixed loan are calculated by adding the amount of principal and interest, and dividing the total into equal payments for the term of the loan, explains the Consumer Financial Protection Bureau. The principal is defined as the total loan amount, and the interest is the amount of money a borrower pays a lender for the right to borrow.

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Full Answer

Monthly payments for a fixed-rate loan are dependent on a number of factors, including the total amount of the loan, percentage rate, down payment amount and length of loan, according to the CFPB. Usually, fixed rate loans entail equal monthly payments for the total term of the loan. Monthly payments are commonly understood to consist of principal and interest totals.

The principal amount is the total of the original loan, and the principal portion of a payment on a loan is the amount of the payment that is applied to the original loan amount, explains the U.S. Department of Education. The interest portion of a payment does not reduce the original loan amount. Rather, it is the fee paid to the lender for the use of the lender's money in making a large purchase. The way to calculate the interest amount is to multiply the total principal balance since the last payment by the number of days since the last payment, multiplied by the interest rate factor. The interest rate factor for the loan is calculated by dividing the loan's interest rate by the number of days in the year.

Though it is possible for borrowers to calculate loan payment amounts themselves, there are many trustworthy payment calculators available to consumers from government and private sector organizations, including one available from Maryland.gov.

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