How to Calculate an Installment Loan Payment

Step-by-Step Guide

1. 1

   Step 1: Find your loan information.

   The loan information is in your loan documents.
   
   If you are estimating a payment before applying to a loan you can just plug in estimates.
   
   Speak with the loan originator if you have problems locating any details.
   
   Note that typically the tax is not included in the loan principle unless it is specifically rolled into the loan.
   
   There are two types of taxes.
   
   One is a property tax and the other is a transfer tax.
   
   Either party may pay either tax.
   
   In the United States for non-foreclosure properties, the seller generally pays the transfer tax, on some foreclosures the buyer pays.
   
   Both sides usually pay their prorated portions of the property tax due up to the date of sale for the seller and from the date of sale for the buyer.
   
   A lender can roll these taxes into the loan if the property appraises high enough to allow enough equity or there is enough of a down payment to roll them in and have the required down still.
2. 2

   Step 2: Learn the equation to calculate your payment.

   The equation to find the monthly payment for an installment loan is called the Equal Monthly Installment (EMI) formula.
   
   It is defined by the equation Monthly Payment = P (r(1+r)^n)/((1+r)^n-1).
   
   The other methods listed also use EMI to calculate the monthly payment. r:
   Interest rate.
   
   This is the monthly interest rate associated with the loan.
   
   Your annual interest rate (usually called an APR or annual percentage rate) is listed in the loan documents.
   
   To get the monthly interest rate that you need, simply divide the annual interest rate by
   12.
   
   For example, an 8% annual interest rate would be divided by 12 to get a monthly interest rate of
   0.67%.
   
   This would then be expressed as a decimal for the equation by dividing it by 100 as follows:
   0.67/100=0.0067.
   
   So
   0.0067 will be the monthly interest rate used in these calculations. n:
   Number of Payments.
   
   This is the total number of payments made over the life of the loan.
   
   For example, in a three year loan paid monthly n = 3 x 12 =
   36.
   
   P:
   Principal.
   
   The amount of the loan is called the principal.
   
   This is typically the final price after tax of the asset purchased less any down payment. , In the above example n = 36, we will use
   0.0067% for the monthly interest rate (from an annual 8%), and $3,500 for the principal.
   
   So filling this out, Monthly Payment = $3,500*(0.08(1+0.0067)^36)/((1+0.0067)^36-1).
   
   Write out the formula with your numbers even if you feel comfortable working with it.
   
   It can eliminate simple math errors.
   
   Solve the parentheses first.
   
   Simplify the first part of the equation to $3,500*(0.0067(1.0067)^36)/((1.0067)^36-1).
   
   Handle the exponents.
   
   This then becomes $3,500*((.0067(1.272)/(1.272-1)) Finish the parts still in parenthesis.
   
   This results in $3,500*(0.008522/0.272) Divide and Multiply the rest.
   
   The result is $109.66. , In this example, the formula resulted in a payment of $109.66.
   
   That means you would make 36 equal payments of $109.66 for a loan of $3,500 at an 8% interest rate based on our example.
   
   Try changing some numbers in order to understand the impact of different interest rates or term length of the loan on the monthly payment amount.
3. 3

   Step 3: Plug your information into the equation.

4. 4

   Step 4: Understand what that number means.

Detailed Guide

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