The Payment Calculator can determine the monthly payment amount or loan term for a fixed interest loan. Use the "Fixed Term" tab to calculate the monthly payment of a fixed-term loan. Use the "Fixed Payments" tab to calculate the time to pay off a loan with a fixed monthly payment.
Fixed Term Approach vs. Fixed Monthly Payment
Fixed Term Financing
Mortgages, auto loans, and personal financing typically utilize a fixed timeframe for debt repayment. Choosing a shorter amortizing term drastically reduces cumulative interest paid, though it increases monthly obligations.
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ]
- M: Calculated monthly payment.
- P: Principal loan balance borrowed.
- i: Monthly interest rate (APR / 12).
- n: Total term duration in months.
Fixed Monthly Payment Amount
This method determines the total repayment period required given a predetermined monthly budget. If monthly payments fail to cover interest accumulation, negative amortization occurs, expanding debt balance over time.
Understanding APR (Annual Percentage Rate)
The base interest rate measures the standalone borrowing cost for principal. APR provides a comprehensive metric by incorporating lender origination charges, broker fees, and closing administrative costs into an annualized percentage rate.
Frequently Asked Questions (FAQs)
1. What is the difference between fixed term and fixed payment loans?
A fixed term loan calculates the required monthly payment given a specific term length, whereas a fixed payment loan calculates the time required to eliminate debt given a fixed monthly payment amount.
2. What happens if a monthly fixed payment is too low?
If your fixed monthly payment does not cover accrued interest, negative amortization occurs, causing the outstanding loan principal to grow instead of shrinking.
3. How does APR differ from the nominal interest rate?
The nominal interest rate reflects only the direct cost of borrowing principal, whereas APR accounts for additional financing charges such as loan processing fees and administrative costs.