Overview

Main Menu Name: Loan Pay

The program will calculate the amount of each periodic payment, the interest and principal included in each payment, and the totals of interest and principal paid over the term of the loan, as well as the "annual percentage rate"(or "APR") for the loan.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

The amount of each payment on a loan, and how much of each payment is interest or principal, depends not only on the principal amount of the loan, the interest rate, and the term (duration) of the loan, but also the payment frequency (monthly, quarterly, semiannually, or annually) and whether the loan is amortized, level principal, or interest-only.

In an amortized loan, the payments are calculated so that the periodic payments of combined interest and principal are equal amounts over the term of the loan. The interest is always calculated on the principal balance owed, but the interest amount goes down (and the principal amount goes up) as the principal of the loan is paid. So, early in the loan, the payments will be mostly income with very little principal paid, while towards the end of the loan the payments will be mostly principal with very little interest payable on the declining loan balance.

In a level-principal loan, the principal payment is fixed as the amount needed to pay off the principal amount over the stated term, and if there is no "balloon" payment, then the principal portion of each loan payment will be the principal amount of the loan divided by the number of payments to be made. The interest portion of each payment is calculated on the principal balance remaining, so the interest amount goes down as the principal of the loan is paid. Because the principal portion of each payment is a fixed amount, and the interest portion goes down over the course of the loan, each loan payment will be different, and the payments will go down over the term of the loan.

In an interest-only loan, no principal is paid until the end of the term. Because the principal of the loan remains the same throughout the term, the interest payments also remain the same.

A compromise between an interest-only loan and an amortized or level-principal loan is a loan in which some principal is paid during the term and the balance is paid as a "balloon" at the end of the term. So, for example, the periodic payments on a loan can be calculated based on an amortization over 30 years even though the term of the loan is only 15 years, in which case the balance of the principal is payable as a lump sum "balloon" at the end of the 15 years. A level-principal loan can also be calculated with a principal-recovery period that is longer than the actual term of the loan, also resulting in a balloon payment at the end of the term.

The "annual percentage rate" or "APR" is a useful number to know in comparing the true costs of different kinds of loans, and the APR is not necessarily the same as the interest rate used to calculate the loan payments. If the payments are monthly, quarterly, or semiannual, the APR will not be the same as the interest rate that is entered for the note because payments that are more frequent than annual have the effect of compounding the interest rate, so the APR (or effective interest rate) is higher.

Why should I use this calculator?

The amount of each payment on a loan, and how much of each payment is interest or principal, depends not only on the principal amount of the loan, the interest rate, and the term (duration) of the loan, but also the payment frequency (monthly, quarterly, semiannually, or annually) and whether the loan is amortized, level principal, or interest-only.

In an amortized loan, the payments are calculated so that the periodic payments of combined interest and principal are equal amounts over the term of the loan. The interest is always calculated on the principal balance owed, but the interest amount goes down (and the principal amount goes up) as the principal of the loan is paid. So, early in the loan, the payments will be mostly income with very little principal paid, while towards the end of the loan the payments will be mostly principal with very little interest payable on the declining loan balance.

In a level-principal loan, the principal payment is fixed as the amount needed to pay off the principal amount over the stated term, and if there is no "balloon" payment, then the principal portion of each loan payment will be the principal amount of the loan divided by the number of payments to be made. The interest portion of each payment is calculated on the principal balance remaining, so the interest amount goes down as the principal of the loan is paid. Because the principal portion of each payment is a fixed amount, and the interest portion goes down over the course of the loan, each loan payment will be different, and the payments will go down over the term of the loan.

In an interest-only loan, no principal is paid until the end of the term. Because the principal of the loan remains the same throughout the term, the interest payments also remain the same.

A compromise between an interest-only loan and an amortized or level-principal loan is a loan in which some principal is paid during the term and the balance is paid as a "balloon" at the end of the term. So, for example, the periodic payments on a loan can be calculated based on an amortization over 30 years even though the term of the loan is only 15 years, in which case the balance of the principal is payable as a lump sum "balloon" at the end of the 15 years. A level-principal loan can also be calculated with a principal-recovery period that is longer than the actual term of the loan, also resulting in a balloon payment at the end of the term.

The "annual percentage rate" or "APR" is a useful number to know in comparing the true costs of different kinds of loans, and the APR is not necessarily the same as the interest rate used to calculate the loan payments. If the payments are monthly, quarterly, or semiannual, the APR will not be the same as the interest rate that is entered for the note because payments that are more frequent than annual have the effect of compounding the interest rate, so the APR (or effective interest rate) is higher.

In addition to principal and interest, loan payments can include other amounts agreed to by the lender and borrower. For example, mortgage loan frequently require the borrower to pay additional amounts into an escrow fund to cover real estate taxes and the costs of insuring the property.

Getting Started

Entering Data

1. Principal of Note:  Enter the amount of money borrowed or credit extended (in the case of an installment sale).
2. Interest Rate:  Enter the annual rate of interest on the loan.
3. Term of Note:  Enter the term of years for the loan.
4. Type of Note:  Select from amortized (in which each payment is the same), level-principal (in which the principal portion of each payment is a fixed amount but the interest portion changes as the principal is paid), or interest-only (in which fixed amounts of interest are paid but no principal is paid until the end of the term of the note).
5. Payment Period:  Select from Monthly, Quarterly, Semiannual, or Annual.
6. Balloon Payment:  Check this box if the amortization or level-principal payments should be calculated using a number of years greater than the term of the loan, so that there is a principal "balloon" payment at the end of the term.
7. Amortization or Principal-Recovery Period:  If "Balloon Payment" is checked, enter the number of years to be used to calculate the amortized or level-principal payments.

Results

The program will calculate the amount of each periodic payment, the interest and principal included in each payment, and the totals of interest and principal paid over the term of the loan.

The results of the calculations are shown as a chart with columns and rows, each row representing one periodic payment on the loan.

In the header of the column showing the interest payments, the program also shows the "annual percentage rate" or "APR" that the interest payments represent. If the payments of monthly, quarterly, or semiannual, the APR will not be the same as the interest rate that is entered for the note because payments that are more frequent than annual have the effect of compounding the interest rate, so the APR (or effective interest rate) is higher.