How to Calculate Monthly Loan Payments?

Question:

If you borrow $10,000 at an annual interest rate of 5% and plan to repay the loan with monthly payments for 3 years, what will be the amount of each payment?

Answer:

The monthly payment for a $10,000 loan with a 5% annual interest rate that is repaid over 3 years will be approximately $299.71.

Calculating monthly loan payments involves the use of a formula for an annuity to determine the fixed amount that needs to be paid each month to repay the loan. In this case, we have a principal amount (P) of $10,000, an annual interest rate (r) of 5%, and a loan term of 3 years (n).

The formula for calculating the monthly loan payment is: PMT = P * (r/12) / (1 - (1 + r/12)^(-n*12)). Here, P is the principal amount, r is the annual interest rate, and n is the number of years.

Using the given values, we can plug them into the formula: PMT = 10000 * (0.05/12) / (1 - (1 + 0.05/12)^(-3*12)). After the calculation, the monthly payment comes out to be approximately $299.71.