Calculating monthly payments on a personal loan isn't that difficult to understand. A $1000 loan with a term of 5 years will have lower monthly payments as compared to a loan of the same amount but with a term of 2 years. The formula consists of mainly your principal amount, interest rate, and loan term.
Payment Calculation Formula
The monthly payment calculation formula is different for the two kinds of loans:
Simple Interest Loan
The formula for a simple interest loan is as follows:
M = P x R
Where
M = Monthly payments for the loan
P = Principal (initial amount borrowed)
R = Interest rate per month (or annual rate divided by the number of payments per year)
Amortizing Loans
There is a different procedure to follow while calculating monthly payments on amortizing loans. The formula is:
M = P/{[(1+R)^T]-1}/[R(1+R)^T]
Where
M = Monthly payment due
P = Principal balance or total loan amount
R = Monthly interest rate
T = Number of months to repay the loan