An individual may borrow a certain amount of money, commonly referred to as the principal, from a bank or another lender. Then, under the loan agreement, the money is paid back in regular monthly instalments over a designated period of time. Since the lender typically provides the money at a specified annual percentage rate (APR), you need to take into account the interest paid to the bank when computing the instalment payments. As an example, we will calculate payments to amortise a £13,000 loan given at an APR of 6.6 per cent for 5 years.
- Skill level:
- Moderately Easy
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Things you need
Calculate the loan duration in months by multiplying the number of years and 12. In the example, the five year loan corresponds to 5 x 12, which equals 60 months.
Divide the loan APR by 12 and 100 to calculate the interest rate per month. In our example, the monthly interest rate is 6.6 per cent / (12 x 100) = 0.0055.
Add 1 to the monthly interest rate, then raise the sum to the power that equals the loan duration in months. In our example, the value is (1 + 0.0055)^60 = (1.0055)^60 = 1.389711.
Subtract 1 from the value computed in Step 3. In our example, 1.389711 -1 = 0.389711
Multiply the monthly interest rate and the value computed in step 3, then divide the product by the number obtained in step 4. In the example, (0.0055 x 1.389711) / 0.389711 = 0.019613.
Multiply the loan amount by the number from step 5 to calculate the monthly instalment payments for the loan. In the example, payments would be £13,000 x 0.019613 = £254.90. Therefore, this instalment loan's payments would be £254.90 per month.
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