What Is the Lender’s Formula?

Certainly! When it comes to calculating loan payments, lenders use different formulas based on the type of loan. Let’s break down the key formulas:

1. Amortized Loan Payment Formula:
   • For amortizing loans, which include most home mortgages and car loans, the formula calculates your monthly payment (P). Here’s how it works:
     • Principal balance or total loan amount (a): This is the initial amount you borrowed.
     • Periodic interest rate ®: Divide your annual interest rate by the number of payment periods (usually 12 for monthly payments).
     • Total number of payment periods (n): This represents the loan term (e.g., 30 years for a mortgage).
   • The formula for the monthly payment is:P = \frac{{a \cdot r \cdot (1 + r)^n}}{{(1 + r)^n – 1}}
2. Interest-Only Loan Payment Formula:
   • For interest-only loans, where you only pay interest initially, the calculation is simpler:
     • Divide the annual interest rate ® by the number of payments per year (usually 12).
     • Multiply it by the amount borrowed (a):
     \text{Monthly payment} = a \cdot \frac{r}{n}
3. Credit Card Payment Calculations:
   • Credit cards use a straightforward formula for minimum monthly payments:
     • Your card issuer typically requires you to pay either a fixed amount (e.g., $25) or a percentage (e.g., 1%) of your outstanding balance, whichever is greater.

Remember, understanding these formulas helps you make informed decisions about loans and manage your finances effectively! 🏦💡