A bank loan is typically used to make a large purchase such as a house or car. The initial loan is known as the principal and the fee the bank receives for the use of the principle is known as the interest. The size of the payment on a bank loan is calculated by a standard formula.
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Calculator Obtain the principal of the bank loan. Assume for this example that the principle of the loan is $80,000. Obtain the annual percentage rate from the bank and divide this value by 100 to obtain the annual interest rate. Assume the APR is 8 percent for this example. The annual interest rate of this loan is therefore 8 /100 = 0.08. Calculate the interest rate for the payment period. This requires you to divide the annual interest by the number of payments in a year. Assume for this example the payments will be made monthly. The interest rate for the payment period is therefore 0.08 / 12 = 0.00667. Compute the number of payments required to repay the loan by multiplying the length of the loan in years by the number of payments in each year. Assume for this example the loan has a 20-year term. The loan therefore requires 20 x 12 = 240 payments. Use the equation L = I x P / [1 鈭?(1 + I)^-N] from Oak Road Systems. L is the amount of the payment, I is the interest rate, P is the principal and N is the number of payments needed to repay the loan. Calculate the amount of the payment in this example as 0.00667 x 80,000 / [1 鈭?(1 + 0.00667)^-240] = $669.15 per month.
Stan Brown, “Loan or Investment Formulas,” Oak Road Systems