How is the installment loan payment calculation done?

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Regardless of the type of loan you are considering applying for, it is always important to keep in mind the installment  loan payment calculation. This way, you will be able to know how much you have to pay each month and over the life of the loan. With this in mind, this article will provide you with a step-by-step guide to calculating loan payments. 

Understand the different interest rates

Before proceeding with the installment loan payment calculation, it is essential that you understand how interest rates work. This will not only allow you to make the loan calculation but also to choose the most beneficial loan in the long run.

Thus, interest is the cost of borrowing money and is expressed as a percentage of the loan amount. The interest rate greatly influences the monthly installments and the total cost of the loan.

Installment loan payment calculation

Although you can easily find a payment calculator on the Internet, it is a good skill to know the right formula for installment loan payment calculation. Thus, there are different formulas depending on the type of loan.

So, when it comes to a personal loan, you must take the total amount of money borrowed, the periodic interest rate (which is calculated by dividing the annual rate by the number of payment periods) and the number of payment periods.

Thus, the personal loan calculation will look as follows: a loan of, say, 20,000 Canadian dollars with a fixed interest rate of 5% and a repayment period of 12 months equals (20,000 * 0.05) / (1 – (1 + 0.05) ^ (-12) = $1,712.

In the example above, you will have to pay $1,712 per month for 12 months to repay the loan in full. However, if you find the formula too complex, you can use this loan calculator from the Royal Bank of Canada.

Calculation of the total cost of the loan

Another loan calculation to consider when applying for a loan, in addition to the installment loan payment calculation, is the total cost of the loan. This means not only taking into account the money that comes to you, but the sum of the money and the interest.

So, the total cost is obtained after calculating the loan payment. So, the monthly payment must be multiplied by the number of payments to be made.

Thus, 1,712 multiplied by 12 gives us 20,544, so, as you can see, the total loan payment is different from the money borrowed. This happens because of the interest.

Calculation of interest rates

Another operation you should consider when you do the installment loan payment calculation is the interest rate, since as you can see, it directly affects the amount of money you will pay back over time.

Therefore, while it is also possible to find an interest rate calculator on the Internet, understanding how they are calculated can help you make informed decisions when borrowing money.

For simple interest, which is the most common, you must take the amount borrowed and multiply it by the interest rate and the duration of the loan. So, if you borrow $1,000 Canadian dollars at 5% interest for one year, the simple interest would be $50 ($1,000 x 0.05 x 1). However, you can also get an interest rate calculator. 

We hope you find this article useful. If you would like to learn more about personal finance, please visit our blog. On the other hand, if you have fallen on hard times and are considering bankruptcy or a financial restructuring service, we recommend you contact the experts at Poupart Syndic.

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