How to Calculate Principal & Interest Payments

How to Calculate Principal & Interest Payments
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Tip

A spreadsheet program will probably have a function to calculate a monthly payment. This example is calculated in MicroSoft Excel using the function "=-PMT(c, n, L)" or "=-PMT(0.005, 60, 5000)". The negative sign forces the function to display the payment as a positive number.

Any time you borrow money, you must pay back the amount that you borrowed (principal) and the fee the lender charged for borrowing it (interest). Lending institutions use the process of amortization to determine your monthly payment, which is a combination of principal and interest. Amortization ensures you pay your loan in full with consistent payments at regular intervals through the term of the loan. To determine your own payment amounts, you need to know your initial principal, the term of the loan and the annual percentage rate for your interest.

Step 1

Write down your initial principal, your APR and your loan term. Convert your term and APR to the interval you want for your payments. For instance, if the loan term is expressed in years, multiply by 12 to get the number of months for a monthly payment plan. Likewise, divide the APR by 12 to get a per-month interest value. If you want to calculate a biweekly payment schedule, use 26 instead of 12. Principal: $5,000 APR: 6 percent = 0.06/year = 0.005/month Term: 5 years = 60 months

Step 2

Plug these values into the equation for a principal and interest payment and perform the calculations. The graphic contains the example. L = loan principal = 5000 c = periodic rate (monthly in this example) = 0.005 n = term (number of months in this example) = 60 P = principal and interest payment = $96.66/month

Step 3

Multiply the principal by the periodic rate to determine the amount of interest in the first payment. Subtract that number from the monthly payment to determine the amount of principal. 5000*0.005 = $25 interest 96.66-25 = $71.66 principal

Step 4

Subtract the principal payment from the loan principal and repeat the previous step using the new principal balance. 5000-71.66 = $4928.34 principal balance 4928.34*0.005 = $24.64 Interest 96.66-24.64 = $72.02 principal

Step 5

Repeat the process until you have reached the end of the loan term and the principal balance is zero. It helps to use a spreadsheet program. The result is an amortization table for your loan showing the amount of principal and the amount of interest in each monthly payment.

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