Life is made easier in the sense that other than knowing the time after which one would have paid his loan dues, lighter calculations are involved in coming up with the quantum of money that would be paid every month. Therefore, the monthly payment is a vital feature since it determines the solvency of the loan for the borrower’s economic plans. In this article, we shall determine the monthly payment of a sum of $ 40000 under many known circumstances.
The interest rate the loan period and the loan amount, of course, are all the simplest factors determining the monthly loan payment. Such considerable inputs enable one to determine the payment with the help of a loan payment equation. For the given demonstration, let us consider $ 40,000 as a loan quant; thus, the monthly differential payment will be deciphered by the interest rate and duration above.
Regarding this instance, we have fixed the rate of $40000 and an annual interest rate of 6% over five years or sixty monthly installments. We would use the conventional loan payment calculation to get the monthly payment: Applying the regular loan payment equation would assist us in evaluating the monthly payment:
Monthly Payment = Principal x Interest Rate / 12 / (1 – (1 + Interest Rate / 12)^(-Month Term))
Using this formula, plugging the figures: plugging the figures into this formula:
Monthly Payment = $40,000 x 0.06/12 / (1 – (1 + 0. 06/12)^(-60) = $40,000 x 0. 005 / (1 – (1.005) ^ -60) = $767. 28
Therefore, the monthly payments would be around 767 if you borrowed 40,000 utilizing a 6% interest rate for five years.
Let us now consider how, for the same loan term, the monthly payment differs at a higher interest rate.
Loan amount of $40,000 with a Fixed Interest Rate of 8% for Five Years: Payment Schedule Applying the same five-year (60 months) period, let's add the eight percent interest rate. Plugging this once again into our formula: Once again substituting this into our formula:
Monthly Payment = $40,000 x (0. 08/12) / (1 – (1 + 0. 08/12)^-60) = $40,000 x 0. 00667 / (1 – (1 + 0. 08/12)^60 = $805.91
For the same 40,000 loans obtained for five years, increasing the interest rate from six percent to eight percent results in around a $39 monthly increase. Thus, interest is levied and more so the monthly payments to be made climb as the interest rates rise.
Let us now consider the second component of the study issue, namely how the term duration influences the payment.
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