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# Loan Payment Calculator

## What is Loan Payment?

A Loan Payment refers to the amount of money which is required to be repaid by the borrower for every payment period. In most scenarios, the borrowed money is refunded through loan installments of equal amounts throughout the payment term. This type of loan construction is often referred to as an amortized loan.

Each loan payment includes two components: a portion for the interest and a part that goes towards repaying the principal. At the beginning of the loan term, the share of interest is higher, but it decreases as the loan balance reduces. Thus, the proportion of the principal in an installment becomes larger as more of the loan is paid back.

## How to Use Loan Payment Calculator

A Loan Payment Calculator is a powerful tool that makes loan repayment calculations straightforward. The general formula it uses to calculate loan payments is as follows:

`Periodic loan payment = Loan amount / (((1 + Periodic rate) ^ Number of payments) - 1) / (Periodic rate × ((1 + Periodic rate) ^ Number of payments)).`

To commence, you need to insert the loan amount, annual rate, number of years, and frequency (number of payments in a year). If you are not sure about these variables, you can use the tool's pre-filled values as default.

Next, calculate the periodic rate by dividing the annual rate by the number of payments in a year.

`Periodic rate = Annual rate / Number of payments in a year`

Calculate the total number of payments, which is the number of years multiplied by the number of payments in a year.

`Number of payments = Number of years × Number of payments in a year`

With all the necessary variables in place, the calculator applies the loan payment formula to work out the periodic loan payment.

## An Actual example to demonstrate the calculator:

Let's consider a practical example. Suppose you're planning to buy a car that costs \$10,000, and you've decided to finance it using a bank loan at an annual interest rate of 6% to be repaid over 5 years.

Here is how to plug in this data:

• Loan amount: \$10,000

• Annual rate: 6%

• Number of years: 5

• Frequency: monthly (Number of payments in a year = 12)

In this scenario, your periodic rate would be :

0.06 / 12 = 0.005 = 0.5%.

The number of payments would be :

5 * 12 = 60.

Applying these values in the loan payment formula:

Periodic loan payment = Loan amount / (((1 + Periodic rate) ^ Number of payments) - 1) / (Periodic rate × ((1 + Periodic rate) ^ Number of payments))

This would give us:

= 10,000 / (((1 + 0.005) ^ 60) - 1) / (0.005 × ((1 + 0.005) ^ 60)) = \$193.33

Based on this calculation, your monthly loan payment over the 5-year period would come out to be roughly \$193.33.

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