How to Calculate Fixed Rate Loans

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A fixed-rate loan keeps the same interest rate over the life of the loan, making it easier for borrowers to budget for how much the loan will cost because the monthly payment will remain constant. Fixed-rate loans are common for mortgages, car loans and home equity loans. To calculate the monthly payment of a fixed-rate loan, you need to know how much you are borrowing, what the annual interest rate equals and how long you will take to repay the loan.

Call the amount of money you are borrowing A. For example, if you were borrowing $20,000, then $20,000 = A.

Convert the annual interest rate from a percentage to a decimal by dividing by 100. For example, if the annual interest rate of the loan equals 6 percent, you would divide 6 by 100 to get 0.06.

Calculate the monthly interest rate by dividing the annual interest rate expressed as a percentage by 12 and call this M. Continuing the example, you would divide 0.06 by 12 to get M = 0.005.

Calculate the number of monthly payments you are making over the life of the loan by multiplying the years you will take to repay the loan by 12 and call this P. For example, if you were going to repay the loan over 10 years, you would multiply 10 by 12 to get P = 120 total payments.

Plug in A, M and P into the following equation to calculate the monthly payment on the fixed-rate loan: Monthly Payment = (M / (1 - (1+M) ^ -P)) * A In this example, you would plug in $20,000 for A, 0.005 for M and 120 for P, so your expression would be (0.005/(1-(1+0.005)^-120))*20,000, which would simplify to a monthly payment of $222.04.

Tips

  • The caret (^) represents an exponent.

    You can also use an online loan calculator.

References

About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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