Calculate the monthly repayment of your loan
How to calculate an annuity?
An annuity is a fixed payment made at regular intervals (usually monthly) over a certain period. In loans, this concept is often used to calculate the monthly payments a borrower must make to fully repay the loan over a specific term. This calculation takes into account both the principal of the loan and the interest.
The formula to calculate the annuity is:
A = P * r * (1 + r)^n / ((1 + r)^n - 1)
- A is the annuity (the fixed amount to be paid each period)
- P is the principal (the borrowed amount)
- r is the periodic interest rate (annual interest rate divided by the number of periods per year, e.g. months)
- n is the total number of payments (the loan term in periods, e.g. months)
When calculating an annuity, there are some important things to consider:
- The interest rate must match the frequency of payments. If you make monthly payments, you should use a monthly interest rate. This is equal to the annual interest rate divided by 12.
- The number of payments (n) must also match the frequency of payments. If you repay the loan in monthly installments, n should be the total number of months you need to repay the loan.
- The formula assumes regular payments. This means that each payment is exactly the same amount and occurs at exactly the same intervals.
- The calculated annuity includes both the payment of the loan's principal and the interest. Each payment therefore reduces both the amount of interest owed and the outstanding principal.
In general, the purpose of calculating an annuity is to establish a fixed payment amount that the borrower can budget, while also being sure that the loan will be fully repaid by the end of the term.