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There are many ways to calculate finance payments, depending on the type of obligation. It is important to understand that some loans are interest-only, some involve interest or occasional interest payments and some require equal payments that reduce interest and principal over time.
Instructions
- Insert the principal amount of the loan in Column 1. In Column 2, insert the rate of interest charged. In Column 3, multiply Column 1 by Column 2. The result is the amount of interest due on loan. This is called an “interest-only” payment. These are usually temporary loans that are rolled into long-term, fixed-rate obligations.
- For loans requiring minimum payments of irregular amounts, subtract the irregular payment amount from Column 1. This represents the new principal amount. Insert the amount in the next row in Column 1. Examples of this type of loan include second mortgages and business loans.
- Compute loans that self-liquidate by a single payment at regular intervals. The single payment pays principal and interest on a steady schedule that will complete the loan repayment by a specific date. Use the mortgage calculator to complete the calculation by entering relevant data. Use this formula to compute mortgages, car loans and most consumer loans.
- Understand that all these payments are for fixed-rate securities. There is no computation for variable-rate securities because the rate of interest cannot be predetermined. However, using one of the repayment patterns described in Step 1 through Step 3, you can track variable-rate payments by each payment period until the loan is fully amortized.
- Read your loan documents to determine how the rate of interest is compounded. Credit cards, for example, compound monthly. Usually, the rate of compounding corresponds to the length of time between payment periods.
