A Guide to Accurately Calculating Payments on Your Loan

July 9, 2019

Would you believe us if we told you that calculating payments on a loan was as easy as 1-2-3? Illinois Lending offers a loan payment calculator that will do the math for you.  But if you’d like to calculate it yourself, you can do it in these 3 steps.


1. Figure Out Your Loan Type

In order to accurately calculate your loan payments, you first need to determine what kind of loan you’re receiving.

Your specific loan type will use a formula to determine the amount of money you owe. Let’s say you need to calculate a personal loan payment. A personal loan is a type of amortized or installment loan, which means you’ll settle your debt in fixed and regular payments over a designated period of time. Other common types of installment loans are home and auto loans.

Calculating payments on one of these loans is going to be different than calculating payments on an interest-only loan. This type requires you to pay only interest at first—you’ll start paying the outstanding balance of your loan at a specified date, depending on the agreed upon terms and conditions.


2. Understanding Formulas

Once you’ve identified your loan type, your next step is understanding its not-so-secret formula. Since the loans we offer at Illinois Lending are amortized, we’ll start with those first.

To find your amortized loan payments, divide the amount you borrow by an interest rate factor. Your interest rate factor inherently includes your periodic interest rate along with the total number of payments you’d make.

For example, to find the amount you’ll periodically pay for an installment loan, use this basic amortization equation: Loan Payment Amount = Principal / Interest Rate Factor or A=P/R.

Looking at these variables will help everything make more sense:

  • A = loan payment amount (what you’ll periodically pay towards your principal)
  • P = loan principal (what you originally borrowed)
  • R = interest rate factor (where (R) = {[(1 + i) ^ n] – 1 / [ i(1 + i) ^ n]})
  • n = payments per period (the number of times you make a payment)
  • i = interest rate per period (how much interest you’ll pay periodically)

Calculating an interest-only loan is a lot less complicated. All you have to do is multiply the loan principal by your annual interest rate and then divide this amount by the total number of payments you make in a year.

In mathematic terms, that’s A = P(Y) / n where Y = annual interest rate.


3. You Do the Math!

Your last step in our guide is to do the math we’ve just conceptualized. Since calculating payments on an interest-only loan is straightforward, this focuses on amortized loans.

Let’s go back to our personal loan scenario. Say you’ve decided to go on vacation but need some extra cash on hand. You’ve decided to borrow $2,000 for a 1-year period at a 7.5% annual interest rate. You’ve agreed to pay back your loan in bi-weekly installments. Using the equation above, let’s calculate what you’d have to pay per month.

  • i = .00625 monthly (.075 annually / 12 months)
  • n = 24 (2 payments per month X 12 months)
  • R = ~22.2224 ({[(1 + .00625) ^ 24] – 1 / [.00625(1 + .00625) ^ 24]})
  • P = $2,000
  • A = ~$90 ($2,000 / ~22.2224)

In this instance, your monthly payment would be about $90. While this estimate may be close to what you’ll pay for a loan, remember that it’s still just an estimate. For more specific information on a loan, talk to your lender to ensure you agree to one that’s right for you.

Feeling Overwhelmed?

Don’t worry. Whether or not you’re a fan of math, there are a variety of online loan payment calculators available to you that will give you the estimates you need. If it’s loans you’re after, look no further than Illinois Lending. Our personal loan payment calculator is smart, transparent, and easy-to-use. Start calculating today!

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