How to calculate a loan settlement

Written by carter mcbride
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How to calculate a loan settlement
Calculating loan settlement shows the amount and number of payments needed. (calculator image by Henryk Olszewski from Fotolia.com)

Loan settlement is the amount of money a person will have to pay and how frequently that person will have to pay in order to pay off a loan. Lending institutions disclose loan settlement information on the loan settlement statement. For example, a borrower has a £19,500 loan. The loan charges 7 per cent interest. The lending institution wants the borrower to pay monthly for the next five years.

Skill level:
Easy

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Instructions

  1. 1

    Calculate the interest rate per payment period. In our example, the interest rate is 7 per cent per year. Since the borrower will pay monthly, divide 7 per cent by 12 months, which equals 0.005833333.

  2. 2

    Multiply the interest rate per period by the total amount the person borrowed on the loan. In the example, 0.005833333 times £19,500 equals £113.

  3. 3

    Add 1 to the interest rate per month, then raise the sum to the negative power of the number of required payments. In the example, 1 plus 0.005833333 equals 1.005833333. Next, 1.005833333 raised to the power of -60 equals 0.705405038.

  4. 4

    Subtract the number determined in Step 3 from 1. In the example, 1 minus 0.705405038 equals 0.294594962.

  5. 5

    Divide the number calculated in Step 2 by the number calculated in Step 4. In the example, £113 divided by 0.294594962 equals £386.1.

  6. 6

    Break down the terms of the loan. In our example, the borrower must make equal payments of £386.1 each month for the next 60 months, or 5 years.

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