I have a homework assignment to create a calculator that calculates a monthly payment, given a certain loan amount, APR, and loan term (in years). What is the formula I need to use?
1
-
1Have you searched for "loan payment formula? I get many results that give the fairly simple formula.– D StanleyOct 30 '20 at 17:02
Add a comment
|
Using the following variables
s = principal
r = periodic rate
n = number of periods
d = periodic payment
Standard loan equation - formula derived by induction
d = r s (1/((1 + r)^n - 1) + 1)
If your APR is quoted in the USA it will be a nominal rate. For a loan with monthly repayments and a "nominal APR compounded monthly" the periodic rate r = APR/12
E.g.
APR = 5% = 0.05
r = 0.05/12 = 0.00416667
If your APR is quoted in Europe it will be an effective annual rate. To convert to a periodic monthly rate r = (1 + APR/100)^(1/12) - 1
E.g.
APR = 5% = 0.05
r = (1 + 0.05)^(1/12) - 1 = 0.00407412
See Investopedia - Present Value of an Ordinary Annuity for more insight into how this is calculated.
For example, the Investopedia loan illustration, with 5 annual payments and APR of 5% (nominal compounded annually is the same as effective annual rate.)
Using the same example of five $1,000 payments made over a period of five years, here is how a present value calculation would look. It shows that $4,329.58, invested at 5% interest, would be sufficient to produce those five $1,000 payments.
s = 4329.58
r = 0.05
n = 5
d = r s (1/((1 + r)^n - 1) + 1) = 1000
answered Oct 30 '20 at 17:22
-
Just to check my math. Given s=$4329.58, r=0.05/12 n = 5*12 = 60 months, then d = $81.70. Is that correct? Oct 30 '20 at 18:14
-
@moonman239 Hi, yes correct for a nominal APR compounded monthly. The type of nominal rate should always be quoted, because 5% APR compounded quarterly is not the same as 5% compounded monthly, or daily. The correct answer $81.70 compares OK to the ballpark estimate $1000/12 = $83.33, just as a rough check. Oct 30 '20 at 18:22