Banks use formulas to calculate loan payments.
When you take out a loan, a formula is used to calculate the monthly payment that you will need to make to pay back the loan, with interest, by the time the term of the loan expires. To calculate the loan payment by hand, you need to know the amount you've borrowed, how many months you will take to pay off the loan, and what the interest rate on the loan will be.
Instructions
1. Compute the monthly interest rate by dividing the annual interest rate by 12. For example, if your annual interest rate equals 8.172 percent, you would divide 0.08172 by 12 to find the monthly interest rate of 0.00681.
2. Multiply the monthly interest rate by the amount borrowed. For example, if you borrowed $43,000, you would multiply $43,000 by 0.00681 to get $292.83.
3. Add 1 to the monthly interest rate from step 1. In this example, you would calculate 1 plus 0.00681 to get 1.00681.
4. Use the scientific calculated to calculate the result from step 3 raised to the -Mth power, where M is the number of months it will take to repay the loan. In this example, if you were going to repay the loan over nine years, you would raise 1.00681 to the -108th power to get 0.480471674.
5. Calculate 1 minus the result from step 4. In this example, you would subtract 0.480471674 from 1 to get 0.519528326.
6. Divide the result from step 2 by the result from step 5 to calculate the monthly loan payment. Finishing this example, you would divide $292.83 by 0.519528326 to find the monthly payment would be $563.65.
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