Data Source and Methodology

All calculations are based on the standard amortization formula for a fixed-rate loan. The methodology is consistent with the formulas and guidelines provided by the U.S. Consumer Financial Protection Bureau (CFPB) for mortgage and loan calculations.

Authoritative Source: Consumer Financial Protection Bureau (CFPB).
Reference: CFPB Loan Estimate and Closing Disclosure guidance.
All calculations are based strictly on the formulas and data provided by this source.

The Amortization Formula Explained

The calculator determines your periodic payment (M) using the standard amortization formula:

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

Glossary of Variables

  • M (Payment per Period): The fixed amount you pay each period (e.g., monthly).
  • P (Principal): The initial amount of the loan.
  • i (Periodic Interest Rate): The annual interest rate (APR) divided by the number of payment periods per year.
  • n (Total Number of Payments): The loan term in years multiplied by the number of payment periods per year.

How It Works: A Step-by-Step Example

Let's calculate the monthly payment for a secured loan with the following details:

  • Principal (P): $50,000
  • Annual Interest Rate (APR): 7% (or 0.07)
  • Loan Term: 5 years
  • Payment Frequency: Monthly (12 periods per year)

1. Calculate Periodic Rate (i):
$i = 0.07 \text{ (APR)} / 12 \text{ (periods/year)} = 0.005833$

2. Calculate Total Payments (n):
$n = 5 \text{ years} \times 12 \text{ payments/year} = 60 \text{ payments}$

3. Apply the Formula:
$M = 50,000 \times \frac{0.005833(1 + 0.005833)^{60}}{(1 + 0.005833)^{60} - 1}$
$M = 50,000 \times \frac{0.005833 \times 1.4176...}{1.4176... - 1}$
$M = 50,000 \times 0.019801...$

Monthly Payment (M) $\approx$ $990.05

Frequently Asked Questions (FAQ)

What is a secured loan?

A secured loan is a loan backed by collateral—an asset you own, such as a car, home, or savings. The lender can seize this asset if you fail to repay the loan. This collateral reduces the lender's risk, often resulting in lower interest rates compared to unsecured loans.

What can I use as collateral for a secured loan?

Common forms of collateral include real estate (for a mortgage or homeowner loan), a vehicle (for an auto loan), or cash in a savings or investment account. The type of collateral accepted depends on the lender and the loan product.

How is a secured loan different from an unsecured loan?

An unsecured loan (like a credit card or personal loan) is not backed by any collateral. The lender bases their decision on your creditworthiness (credit score, income, etc.). Because the risk is higher for the lender, unsecured loans typically have higher interest rates.

What is APR (Annual Percentage Rate)?

APR is the total cost of borrowing money over a year, expressed as a percentage. It includes the interest rate plus any lender fees (like origination fees). It is a more complete measure of a loan's cost than the interest rate alone.

Can I pay off my secured loan early?

In most cases, yes. Paying off a loan early can save you a significant amount in interest. However, you must check with your lender to see if there is a "prepayment penalty." This calculator assumes no prepayment penalties.

What happens if I default on a secured loan?

If you fail to make payments (default), the lender has the legal right to seize the collateral you pledged. This process is called repossession (for a car) or foreclosure (for a home). This is the primary risk of a secured loan.

Tool developed by Ugo Candido. Finance content reviewed by the CalcDomain Editorial Board.
Last accuracy review: