Installment loans have a unique payment formula because of their monthly payment structure. Each payment made by a loan holder is made out to a given lender with interest and financial fees due each month. People often use installment loans in order to pay for pricier things like cars and moving homes. To determine how much a payment is you can apply the trusted (EMI) equation, or Equal Monthly Installment method. This can be done by hand, or with the help of a calculator using the steps below:
1) Collect your information
Gather loan documents. Loan documents contain all of the information you need to estimate a payment amount. Speaking with the provider of a loan is the best way to clear up any confusion concerning these details.
2) The equation
The equation used to figure out a monthly payment is again called the (EMI) formula. The equation is expressed by = Monthly Payment = P (r(1+R)^n)/((1+r)^n-1).
Next we define each term below:
n: The number of payments. A loan has a set number of these monthly payments. Consider n to simply be the total amount of them made. For example, a 1 year loan has 12 payments.
r: This is the monthly interest rate set out by the loan agreement. To find this, find the interest rate per year found in your documents and divide by 12.
P: This is the loans principal or in other words the final price of the loan after tax has been deducted.
3) Plug and chug
Next, plug your information into the (EMI). Consider the following simple example:
You have a 1 year loan with a monthly interest rate of .042 (a 5% annual rate) and a principal of $2,000. We plug these values into the equation to get, Monthly Payment = $2,000*(.042(1+.042)^12)/(1+.042)^12-1). It is important to carefully write down the numbers on a sheet of paper. This helps avoid mathematical errors. Start with the terms inside the parentheses and then the exponents. This will simplify the equation into: $2,000*((.042(1.63)/(1.63-1)). Next simplify the equation further within each set of parentheses on each side to get: $2,000(.06846/.63). Finally, divide then multiply to get the result of $217.33.
4) Interpret the results
The results above are fairly self-explanatory. You input your information and the equation yielded a monthly payment $217.33. You have 12 payments to make over the course of the year which means you make 12 payments of $217.33. This is the monthly payment on a 2,000 dollar loan taken for 1 year at 5% annual interest.
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