How to calculate loan repayments principal and interest

Loans can be used for all sorts of things in the world of business, from bankrolling your company’s expansion plans to funding a new product line. But where there’s a loan, there’s debt.

While no-one enjoys making loan repayments, understanding how your repayment schedule works is crucial for business owners everywhere. As such, it’s important to have a comprehensive understanding of principal payments and how to calculate the amount you owe. So, what is the principal payment? Get the lowdown on everything you need to know with our simple guide.

What is the principal payment?

There are two basic components of a loan: the principal and the interest. So, what is the principal and interest payment? Essentially, a principal payment is a payment that goes toward the repayment of the original amount of money borrowed in a loan. Interest, on the other hand, is a fee you pay to borrow the funds, typically calculated as an annual percentage of the loan. So, when you make a principal payment, you’re reducing the amount of loan that you’re due to pay back, but not the amount of interest that’s charged on that loan.

Understanding scheduled principal payments

Now that you have a basic understanding of principal payments, it’s important to delve into the mechanics of how they work. When making repayments on a loan, there are two basic options:

• Even principal payments – With an even principal payment loan, the principal payments will be the same in every period. For example, if you have a £20,000 loan that amortises over the course of 10 years, the principal payments will amount to £2,000 each year, with no variation.

• Even total payments – When it comes to even total payments, the total payment amount is the same in every period, but the principal will differ. With these types of loans, the principal payment usually increases over time, while the amount of interest decreases.

Although lower principal payments at the beginning of your loan repayments may look like an attractive option, making equal principal payments throughout the term of your repayment schedule could actually yield lower interest rates, meaning that you’ll end up paying a lower amount than you would with an even total payments schedule.

Calculating your business’s monthly principal payments

If your business is dealing with loan repayments, understanding how to calculate your principal is likely to be beneficial. After all, according to a study we conducted, 21% of borrowers say that not knowing how much they need to pay is the most likely cause of their missed payments. So, how do you calculate your scheduled principal payments?

There’s a relatively complicated formula you can use, which is as follows:

a / {[(1+r)^n]-1]} / [r(1+r)^n] = p

Note: a = total loan amount, r = periodic interest rate, n = total number of payment periods, p = monthly payment).

If you’re looking for an easier way to work out your principal payments, a principal payment calculator may be the way to go.

Online principal payment calculators

With a few pieces of basic information about your loan, such as the initial loan amount, the interest rate, the payment frequency, and so on, you can find out the full purchase cost, total interest, and more using a principal payment calculator. There are many different options available online, but to get started, why not check out Calculator.me’s principal payment calculator.

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If you find yourself in a financially tight spot, borrowing money can help you through the situation, but it’s important to note that this isn’t a long-term solution. And unless you pay off your loan, you’ll find yourself stuck in a vicious cycle of taking out loans to pay off previous loans or sitting by as their interest rates spike (learn how to calculate interest on loan per month here), making it even harder for you to be debt-free. What is a payday loan? Learn the payday loan definition here.

Nevertheless, there’s a fairly simple way to avoid your financial crisis escalating, which is learning how to calculate interest on a loan so that you can be aware of its cost and sure of your ability to fulfil your repayments in the future. Therefore, allow us to illustrate the loan repayment formula. Learn what is a loan here.

The Know-How of the Loan Repayment Formula

What Type Is Your Loan?

Ask yourself: “what is this loan’s type?” Is it an amortizing loan or an interest-only loan? With the former, both interest and principal are paid simultaneously over the loan terms. Learn to pay off loans fast here. The catch is if you pay early, that doesn’t help reduce the principal balance sooner. Learn what is defaulting on loans here.

As for interest-only loans, you only have to pay interest during the first years of the loan unconditional approval process, and you don’t have to pay anything on the principal. This entails that you have to pay less every month, compared to the amortizing loan. Adversely, you’re going to have to procure the full principal at a certain point in the future. If you need a loan been refused everywhere, apply today with Perfect Payday.

What Is the Suitable Formula for Your Loan Type?

Interest-Only Loan

This formula is a fairly straight-forward one for calculating interest:

Loan Payment (P) = Loan Balance (B) x (Annual Interest Rate/12)

Amortizing Loan

The formula below requires a little more than three brain cells, as you’ll see:

Number of Payment Installments (n) = Payments per year x number of years

Periodic Interest Rate (r) = Annual Rate (in decimal figure) / Number of Payment Installments

Discount Factor (D) = {[(1 + r)n] – 1} / [r(1 + r)n]

Loan Payment (P) = Total Loan Amount (A) / Discount Factor (D)

There’s another formula (or a way to put it) for the amortizing loan, and it looks like this:

Total Repayment = P * (r/n) * (1 + r/n)t*n / [(1 + r/n)t*n – 1]

Total Repayment = Principal Repayment + Interest Payment

Since these formulas are quite complex, we decided to arrange them into steps:

1. Write down the current outstanding amount of the loan (P).
2. Write down the interest rate (r).
3. Write down the loan tenure (t), which is the number of years. What are loans with a paid default? Learn about them here.
4. Write down the compounding frequency per year for the loan (n).
5. Calculate the loan’s principal repayment using the outstanding loan amount, rate of interest, loan tenure, and the compounding frequency per year.
6. Add the principal repayment to the interest payment to get the total repayment. We define secured loan here.

Use an Online Loan Calculator

Suppose you belong to the not-so-exclusive club of people who are entirely mortified by math. Learn about loans for 17 year olds here. In that case, you might benefit from using an online calculator, such as this common bank calculator. All you need to do is log in the numbers in the right slots. Learn what is personal loans here.

How to Calculate a Loan: Tips and Tricks

• Interest-only and amortized loans aren’t the only two types, as there are graduated payment, negatively amortized, option, and balloon loans. Consequently, calculating loans or interest varies from one type to the other.
• Though the formula may change according to those types, it won’t change according to what you’re using the loan to pay off.
• The original loan amount is also known as Present Value or PV.
• The rate per period should be consistent with the number of periods. To illustrate, if the loan payments are monthly, you should adjust the rate per period to the monthly rate. Also, the number of periods should be indicative of the number of months on loan.
• Create an amortization table, and divide it into five columns: payment, amount, interest, principal, and balance.
• Using an excel sheet to track your payments can be helpful, especially with excel’s built-in functions for amortization formulas. All you have to do is find the function that corresponds to the formula you’re using. For example, the PMT function’s formula looks like this: =PMT(rate,periods,-amount).

Conclusion

All in all, we hope this article has been of help on how to work out loan repayments. Learn what do I need to apply for a personal loan here. If you can determine the type of loan, whether it’s an interest-only loan, amortizing loan, or something completely different, you can use the corresponding loan repayment formula to your loan type and calculate the loan payment. Can you get multiple payday loans at once? Read more about multiple payday loans here.

However, if these formulas intimidate you, you can always revert to excel functions and online calculators, where all you need to do is log in the right numbers in each slot to get accurate results. Knowing a loan’s cost can help you wisely choose the right one for you, keep up with your repayments, and be more financially responsible, overall. Learn how long to pay off my loan here.

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