Loans are usually amortized over a volume of fixed, monthly payments. Car loans and home mortgages use such amortization schedules when calculating the unchanging amount of your monthly payments. The resulting payment includes the interest charged and equity toward paying off the loan. Home mortgages may be higher than the calculated amount, because they usually include an additional escrow payment, which covers taxes and insurance.
1. Divide the annual interest rate by 12 to calculate the monthly interest rate. As an example, if your car loan required a 4 percent annual interest rate, then dividing by 12 gives you a monthly interest rate of 0.33 percent.
2. Add 1 to the monthly interest rate, in decimal format. In the example, 1 plus 0.003333 gives you 1.0033.
3. Raise this figure to the nth power, where "n" is the number of monthly payments, expressed as a negative value. Calculate the number of monthly payments by multiplying the number of years in the loan by 12. In the example, a five-year loan would have 60 monthly payments, so raise 1.0033 to the power of negative 60 to get 0.8206.
4. Subtract this figure from 1. Continuing with the example, 1 minus 0.8206 gives you 0.1794.
5. Divide this figure into the monthly interest rate. In the example, 0.0033 divided by 0.1794 gives you 0.01839.
6. Multiply this figure by the original loan amount to determine your monthly payment. In the example, 0.01839 times a loan amount of $20,000 calculates your monthly payment of $367.89.
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