What Will My Monthly Payment Be?

 

 

What Will My Monthly Payment Be?

The amount of your monthly payments on a personal loan or a line of credit depend on three things:

#1 The amount of the loan or line of credit.
#2 The interest rate (determined by the lenders)
#3 The term of the loan or line of credit (how long it takes to pay it off)

The following is an example of what it might cost per month for various personal loan amounts. The interest rate that is being used in these examples is 14%. If the interest rate is lower, obviously, the payment would also be lower. If you are seeking a different amount than the ones listed, the approximate monthly payments can be figured out with a calculator. Example, If you seek $2,000.00, find out what the monthly payment for $1,000 would be on the chart below, and multiply by 2.

Monthly payment chart based on 14% interest rate:

Amount

Term

Monthly Payment

$1,000.00

3 years

$34.18

$1,000.00

4 years

$27.33

$1,000.00

5 years

$23.27

 

 

 

$2,500.00

3 years

$85.45

$2,500.00

4 years

$68.32

$2,500.00

5 years

$58.18

 

 

 

$10,000.00

3 years

$341.80

$10,000.00

4 years

$273.30

$10,000.00

5 years

$232.70

 

 

 

$15,000.00

3 years

$512.70

$15,000.00

4 years

$409.95

$15,000.00

5 years

$349.05

 

 

 

Long-Term Loan Repayment Methods

Quick Facts...

  • Long-term loans can be repaid in a series of annual, semi-annual or monthly payments.
  • Payments can be equal total payments, equal principal payments or equal payments with a balloon payment.
  • The Farmer's Home Administration usually requires equal total payments for intermediate and long-term loans.
  • Use an amortization table to determine the annual payment when the amount of money borrowed, the interest rate and the length of the loan are known.

Money borrowed for long-term capital investments usually is repaid in a series of annual, semi-annual or monthly payments. There are several ways to calculate the amount of these payments:

  1. equal total payments per time period (amortization);
  2. equal principal payments per time period; or
  3. equal payments over a specified time period with a balloon payment due at the end to repay the balance.

When the equal total payment method is used, each payment includes the accrued interest on the unpaid balance, plus some principal. The amount applied toward the principal increases with each payment (Table 1).

The equal principal payment plan also provides for payment of accrued interest on the unpaid balance, plus an equal amount of the principal. The total payment declines over time. As the remaining principal balance declines, the amount of interest accrued also declines (Table 2).

These two plans are the most common methods used to compute loan payments on long-term investments. Lenders also may use a balloon system. The balloon method often is used to reduce the size of periodic payments and to shorten the total time over which the loan is repaid. To do this, a portion of the principal will not be amortized (paid off in a series of payments) but will be due in a lump sum at the end of the loan period. For many borrowers, this means the amount to be repaid in the lump sum must be refinanced, which may be difficult.

Table 1: Example of loan amortization: equal total payment plan.

Year

Loan amount $10,000, annual rate 12%
8 annual payments

Annual payment

Principal payment

Interest

Unpaid balance

$10,000.00

1

$2,013.03

$ 813.03

$1,200.00

9,186.87

2

2,013.03

910.59

1,102.44

8,276.38

3

2,013.03

1,019.86

993.17

7,256.52

4

2,013.03

1,142.25

870.78

6,114.27

5

2,013.03

1,279.32

733.71

4,834.95

6

2,013.03

1,432.83

580.20

3,402.12

7

2,013.03

1,604.77

408.26

1,797.35

8

2,013.03

1,797.35

215.68

0

Total

$16,104.24

$10,000.00

$6,104.24

0

 

Table 2: Example of loan amortization: equal principal plan.

Year

Loan amount $10,000, annual rate 12%
8 annual payments

Annual payment

Principal payment

Interest

Unpaid balance

$10,000.00

1

$2,450.00

$1,250.00

$1,200.00

8,750.00

2

2,300.00

1,250.00

1,050.00

7,500.00

3

2,150.00

1,250.00

900.00

6,250.00

4

2,000.00

1,250.00

750.00

5,000.00

5

1,850.00

1,250.00

600.00

3,750.00

6

1,700.00

1,250.00

450.00

2,500.00

7

1,550.00

1,250.00

300.00

1,250.00

8

1,400.00

1,250.00

150.00

0

Total

$15,400.00

$10,000.00

$5,400.00

0

Repayment Principles

To calculate the payment amount, all terms of the loan must be known: interest rate, timing of payments (e.g. monthly, quarterly, annually) length of loan and amount of loan. Borrowers should understand how loans are amortized, how to calculate payments and remaining balances as of a particular date, and how to calculate the principal and interest portions of the next payment. This information is valuable for planning purposes before an investment is made, for tax management and planning purposes before the loan statement is received, and for preparation of financial statements.

With calculators or computers, the calculations can be done easily and quickly. The use of printed tables is still common, but they are less flexible because of the limited number of interest rates and time periods for which the tables have been calculated.

Regardless of whether the tables or a calculator is used, work through an example to help apply the concepts and formulas to a specific case.