Data Source and Methodology

This calculator uses the standard financial formula for an amortizing loan, also known as the loan payment formula. This is the same formula used by banks and financial institutions to calculate fixed periodic payments for mortgages and business term loans.

All calculations are based strictly on this formula, assuming a fixed interest rate and that payments are made consistently as scheduled.

The Formula Explained

The periodic payment (M) is calculated using the following formula, where P is the principal, i is the periodic interest rate, and n is the total number of payments:

$$ M = P \frac{i(1 + i)^n}{(1 + i)^n - 1} $$

Glossary of Variables

M (Periodic Payment)
The fixed amount you will pay each period (e.g., monthly).
P (Principal Loan Amount)
The initial amount of money you are borrowing.
i (Periodic Interest Rate)
The annual interest rate (APR) divided by the number of payment periods per year. For example, a 6% APR paid monthly would have a periodic rate (i) of 0.06 / 12 = 0.005.
n (Total Number of Payments)
The total number of payments over the life of the loan. For example, a 5-year loan paid monthly would have 5 * 12 = 60 payments.

How It Works: A Step-by-Step Example

Let's walk through a real-world scenario to see how the calculation is performed.

Imagine you are taking out a $50,000 business loan to buy new equipment. The lender offers you a 5-year term at a 7.5% APR, with monthly payments.

  1. Identify the variables:
    • Principal (P) = $50,000
    • Annual Rate (r) = 7.5% or 0.075
    • Term (t) = 5 years
    • Payments per year = 12
  2. Calculate 'i' and 'n':
    • Periodic Interest Rate (i) = 0.075 / 12 = 0.00625
    • Total Payments (n) = 5 years * 12 payments/year = 60
  3. Plug into the formula:
    • $$ M = 50,000 \frac{0.00625(1 + 0.00625)^{60}}{(1 + 0.00625)^{60} - 1} $$
    • $$ M = 50,000 \frac{0.00625(1.45329...)}{(1.45329...) - 1} $$
    • $$ M = 50,000 \frac{0.009083...}{0.45329...} $$
    • $$ M = 50,000 \times 0.020038... $$
  4. Final Monthly Payment (M):
    • $$ M \approx \$1,001.91 $$

Your monthly payment would be $1,001.91. The calculator performs this computation instantly and also generates the full schedule showing how much of each payment goes to interest vs. principal.

Frequently Asked Questions (FAQ)

What is amortization?

Amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment consists of both principal and interest. In the beginning, a larger portion of the payment goes toward interest, and as the loan matures, a larger portion goes toward paying down the principal.

What is the difference between APR and interest rate?

The interest rate is the cost of borrowing the money, expressed as a percentage. The Annual Percentage Rate (APR) is a broader measure that includes the interest rate plus any lender fees, origination fees, or other costs associated with the loan. APR gives you a more complete picture of the loan's true cost.

Can I make extra payments on my business loan?

Most business loans allow for prepayments, which can help you pay off the loan faster and save on total interest. However, you must check your loan agreement for any 'prepayment penalties.' This calculator assumes no prepayments are made.

How is this different from a simple interest loan?

This calculator uses an amortizing formula, where interest is calculated on the *remaining balance* of the loan. A simple interest loan calculates interest based on the *original principal* for the entire loan term, which is less common for standard business term loans.

What information do I need to apply for a business loan?

Lenders typically require a detailed business plan, personal and business financial statements (like balance sheets and income statements), tax returns, bank statements, and legal documents (like articles of incorporation). Use this calculator to model different scenarios before you apply.

Why is my first payment mostly interest?

Because you owe interest on the largest principal balance at the beginning of the loan. As you pay down the principal, the amount of interest owed each period decreases, allowing more of your fixed payment to go toward the principal balance.

Tool developed by Ugo Candido. Financial methodology verified by the CalcDomain Editorial Board.
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