6 Easy Steps to Calculate Your Monthly Loan Payment
As a small business owner you are likely to require a small business loan at some point, whether to help start or grow your business. Small business loans are meant to help your business succeed. However, like all loans, they need to be repaid. It’s important to borrow only what you are capable of paying back.
How can you know if you will be able to make the monthly payments? Being able to calculate your monthly loan payment is an essential skill which every small business owner needs.
Calculating Your Monthly Payment
Calculating your monthly payment is not very difficult. You require only three pieces of information: the loan amount, the interest rate, and the loan term.
To put it in perspective, let's work with real numbers. We’ll use an example of a $20,000 loan at 6% interest per year, for a term of 2 years. To calculate the monthly loan payment, follow these 6 easy steps:
Calculate the monthly interest rate. Lenders will give you a yearly interest rate, so you’ll need to divide by 12 to determine how much of the interest applies per month. In our example, 6 percent divided by 12 months equals 0.005.
Now add 1 to the monthly interest rate you calculated in Step one. In our case, 1 plus 0.005 equals 1.005.
Raise the number you calculated in Step 2, to the power of the negative number of payments you will make. In our example, we used a loan term of two years which means 24 payments (2 x 12 payments per year), so 1.005 raised to the power of -24 equals 0.887186.
Subtract the number calculated in Step 3 from 1. In our example, 1 minus 0.887186 equals 0.112814.
Multiply the monthly interest rate calculated in step one by the total loan amount. In our example, $20,000 times 0.005 equals 100.
Divide the number calculated in Step 5 by the number calculated in Step 4. In our example, 100 divided by 0.112814 equals 24 monthly payments of $866.42.
Calculating The Total Interest Amount
You can also use these numbers to easily calculate the total amount of interest you will pay on the loan.
Simply multiply the monthly payment from Step six by the number of months, and then subtract the loan principal.
So in our example, $866.42 times 24 equals $20,794.08, and when you subtract that from the initial loan amount of $20,000, the total interest you would pay on this loan is $794.08.
Knowing what your monthly loan payment will be is essential information for any small business owner looking to take out a loan. Whether you do the calculations yourself or use an online calculator, you need to know if you can afford the loan you want so that you don’t get in over your head.
Crunched the numbers and ready to apply for that loan? Check out our list of the best small business loan providers!