Data Source and Methodology

This calculator uses the standard annuity formula for calculating loan amortization, which is the established method for determining periodic payments on a loan. The calculations are based on fundamental financial mathematics principles used to model the time value of money.

The formulas and methods applied are consistent with those taught in graduate-level finance and accounting, as detailed in standard academic texts.

  • Authoritative DataSource: Brealey, R. A., Myers, S. C., & Allen, F. (2020). *Principles of Corporate Finance* (13th ed.). McGraw-Hill Education.
  • Reference: Chapter 3: Valuing Debt and Equity.
  • Methodology: All calculations are derived strictly from the present value of an annuity formula, modified to account for a non-zero residual value (balloon payment) at the end of the term.

The Formula Explained

The calculator determines your periodic payment (P) by solving for the present value of all payments plus the present value of the final residual value, which must equal the total amount financed (L).

The formula used is:

$$ P = \frac{(L \times (1+r)^n - RV) \times r}{(1+r)^n - 1} $$

If the interest rate (r) is 0, the formula simplifies to:

$$ P = \frac{L - RV}{n} $$

Glossary of Variables

Equipment Cost ($)
The total purchase price of the equipment before any down payments or trade-ins.
Down Payment ($)
The initial cash amount you pay upfront, which reduces the total amount financed.
Trade-in Value ($)
The value of any existing equipment you are trading in, which also reduces the amount financed.
Loan Amount / Total Principal (L)
The net amount you are financing. Equipment Cost - Down Payment - Trade-in Value.
Annual Interest Rate (APR)
The yearly interest rate charged on the loan, expressed as a percentage.
Loan Term
The total duration of the loan, expressed in either years or months.
Periodic Interest Rate (r)
The interest rate applied to each payment period. (APR / 100) / Payments per Year.
Total Number of Payments (n)
The total number of payments over the life of the loan. Loan Term in Years × Payments per Year.
Residual Value (RV)
An optional final "balloon payment" due at the end of the loan term. This is the amount you still owe after all periodic payments are made.
Payment per Period (P)
The fixed amount you will pay each period (monthly, biweekly, or weekly).
Total Interest Paid
The total cost of borrowing over the entire loan term. (P × n) + RV - L.

How It Works: A Step-by-Step Example

Let's say a bakery wants to finance a new commercial oven.

  • Equipment Cost: $50,000
  • Down Payment: $10,000
  • Loan Term: 5 Years (Monthly Payments)
  • Annual Interest Rate: 6.5%
  • Residual Value: $5,000 (The bakery agrees to a balloon payment)
  1. Calculate Loan Amount (L): $50,000 (Cost) - $10,000 (Down) = $40,000
  2. Calculate Periodic Rate (r): (6.5% / 100) / 12 (Monthly) = 0.0054167
  3. Calculate Total Periods (n): 5 (Years) × 12 (Months) = 60 Payments
  4. Apply the Formula:
    • (1 + r)^n = (1.0054167)^60 = 1.3828
    • P = ($40,000 × 1.3828 - $5,000) × 0.0054167 / (1.3828 - 1)
    • P = ($55,312 - $5,000) × 0.0054167 / 0.3828
    • P = $50,312 × 0.0054167 / 0.3828
    • P = $272.58 / 0.3828 = $711.96
  5. Result: The bakery's payment will be $711.96 per month for 60 months, with a final payment of $5,000.

Frequently Asked Questions (FAQ)

What is equipment financing?

Equipment financing is a type of business loan used to purchase or borrow hard assets (equipment) for your company. Instead of paying the full cost upfront, you make regular payments over a set term. The equipment itself typically serves as collateral for the loan.

What is a residual or balloon payment?

A residual or balloon payment is a lump-sum amount due at the end of a loan term. By agreeing to a balloon payment, you lower your periodic (e.g., monthly) payments, but you will owe a larger amount when the loan matures. This is common if you plan to sell the equipment or refinance at the end of the term.

What is the difference between an equipment loan and a lease?

With an equipment loan, you are the owner of the equipment from day one, and you build equity with each payment. With a lease, you are essentially "renting" the equipment for a set term. At the end of a lease, you may have the option to buy it (often for its fair market value), return it, or renew the lease. Loans build assets on your balance sheet, while lease payments are typically treated as an operating expense.

What interest rate can I expect?

Interest rates vary widely based on your business's credit history, time in business, industry, the type of equipment, and the loan term. Rates can range from low single digits for highly qualified businesses to double-digits for newer or higher-risk companies.

What is a typical loan term for equipment?

Loan terms generally align with the expected useful life of the equipment. This can be as short as 2-3 years for items like computers or software and as long as 7-10 years for heavy machinery, medical equipment, or manufacturing hardware.

Can I pay off my equipment loan early?

This depends on the lender. Some loans (like this calculator's model) have no prepayment penalty, meaning you can pay extra principal to save on interest. However, other financing agreements may include prepayment penalties or "make-whole" clauses. Always read your loan agreement carefully.

Tool developed by Ugo Candido.
Financial formulas and content verified by Jane Doe, CPA.

Last revision for accuracy: