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Installment Loans Equation
3 Sep 2019

Learn How to Calculate Payments with This Installment Loans Equation

Do you want to make sure that your loan payments are correct? Do you want to be able to learn and understand the installment loan equation? Well, you’ve come to the right place.

With the expensive cost of living, many people turn to lenders for financial help. Already, personal loans are the fast-growing debt for many consumers. The outstanding personal loan balances stand at $120 billion now.

There’s no doubt that loans are becoming popular go-to solutions for many people now. This is especially true with those who are earning wages below average. Still, there is no harm in calculating the equation on your own.

Below, we’ve got a guide on how you can compute and understand the installment loans equation.

1. What Is an Installment Loan?

Allow us to give you a brief summary of what installment loans are first. Installment loans are loans that you can pay off over time. Often, there is a fixed length of time and schedule in which you can pay the loan off.

There are several types of installment loans. These include mortgages, auto loans, and student loans. Personal loans are another type of installment loan.

Many people get installment loans to combine other debts or build credit. They are also used to finance a wedding or buy high-cost acquisitions like land or a house. Some installment loans are available to people with bad credit as well.

Installment loans like mortgages and car loans need good credit. The process for getting approved is also extensive and can take time. Lenders are not as strict with personal loans, though some are with bigger loans.

Installment monthly payments have interest charges and finance fees. Lenders should tell you about the added interest and fees. If you want to make sure, you can use the formula to compute for these and confirm.

2. Computing for the Installment Loans Equation by Hand

Americans owe up to $1.56 trillion in student loan debt alone. If you want to know how much you owe to taxes and to the lending company, you can try computing it by hand. Before you do, you need to look through your loan documents for the loan information.

Monthly Payment = P (r(1+r)^n)/((1+r)^n-1). That is the equation to calculate for monthly payments. People also refer to this as the Equal Monthly Installment formula.

P is the principal. This is the final price after taxes and it’s also less down payments. The monthly interest rate is the one represented by r. The total number of payments you make over the life of the loan is n.

Now that you know what the blanks in the equation are, it’s time to fill them in with the information you have. Write down the formula on a piece of paper and start solving simple problems. Remember to solve the parentheses first.

It’s also good to simplify the first part of the equation when you can. After, handle the exponents then try to solve the parentheses again. When you finish with the parentheses, divide and multiply what’s left.

A simpler alternative formula looks like this: P = r(V) / (1-(1+r) ^-n). This time, P is the monthly payment and V is the borrowed amount. The monthly interest rate is r and n is the number of months to pay off the loan.

Use this formula if you have the monthly interest rate. If you have the annual interest rate (AIR) then divide it by 12. Since there are 12 months in a year, the quotient will be your monthly interest rate.

Use a basic calculator if computing by hand is not your forte. If you want a faster way of knowing your payments, read on for other ways you can do it.

3. Calculating the Installment Loans Equation with Excel

If you don’t have an internet connection, solving for the installment loans at home is possible too. All you need is to open Microsoft Excel to start. As with the last method, you should know your loan information.

Choose a cell and then click the function (fx) button above the workspace. Search and choose the PMT function. A dialog box will come up so you can enter your loan information.

When you select PMT, another box will pop up to ask for your loan information. Rate is the monthly interest rate they charge you while Nper is the number of months in the loan period. Pv is the present value of the loan or the amount you’re borrowing.

Fv is the future value of the loan after 5 years. Use 0 if you plan to pay off the full value before that time. Leave the type blank as it’s used to change the calculation.

The result of the installment loans equation should come up below. Now that you know how to calculate installment loan payments, you can apply for another loan and get approved. What’s stopping you from getting your dream house or car?

4. Online Tools for Calculating the Equation

There are tools online that you can use to calculate your payments as well. You can use spreadsheet programs like Google sheets or search up installment loan calculators. You will undergo the same process of inputting your loan information.

The difference here is the speed of the results. Online installment loan calculators are often free to use. Remember, these sites include probable interest rates for your type of loan.

Start Calculating Your Payments

That’s it for our guide on how you can calculate the installment loans equation.

Now, try to adjust your inputted data. This will let you see how a small change in the sum of your loan amount as well as the interest rate affects monthly payments.

Was that helpful for you? If it was, feel free to check out our other content in our blog. If you have any questions, get in touch today!