Tag Archives: loan calculations

Understanding Loan Calculations

Having looked at how present value and future value equations can help us to understand what our payment schedules look like in terms of their true values, we can now start to dive into the equations that bankers use to determine how much our monthly payments on various types of loans will be. From there, we can apply that amount to our debt-servicing ratio to see just how much capacity for debt we have as a borrower.

loan-calculationsThe loan payment equation comes off as being particularly complicated, but it’s actually quite simple when we look at it conceptually. We are simply determining the optimized rate of the declining balance, and then assigning that percentage a dollar value. In symbolic terms, it works out to the following:

Payment=Principle*Interest RatePayment Periods1-(1+Interest RatePayment Periods) –Payment Continue reading