How to Calculate & Payoff Balances on a Loan

The principal of a loan is the amount of the initial loan, and the interest is a fee the borrower pays the lender for the use of the principal. The lender repays the principal and interest over time with a series of installment payments. A lender can minimize the amount of the interest by paying off the balance of the loan as quickly as possible. The calculation of the current balance requires you to know the principal, interest rate, amount of the payment and number of payments.

Instructions

1

Obtain the principal of the loan from the lender. Assume the principal is $12,000 for this example.

2

Obtain the interest rate from the lender. Lenders generally provide the interest rate as the annual percentage rate, or APR. Assume the APR on this loan is 6 percent.

3

Divide the APR of the loan by 100 to obtain the annual interest rate. The APR of the loan in this example is 6 percent, so the annual interest rate is 6 / 100 = 0.06.

4

Divide the annual interest rate of the loan by the number of payments in a year to obtain the interest rate for the payment period. Assume the loan in this example requires monthly payments. The interest rate for the payment period is therefore 0.06 / 12 = 0.005.

5

Obtain the length of time needed to repay the loan, also known as the term of the loan. Assume the term of the loan in this example is 20 years.

6

Multiply the term of the loan in years by the number of payments in each year to obtain the total number of payments required to pay off the loan. The term of the loan in this example is 20 years, and the loan requires monthly payments, so the loan requires 20 x 12 or 240 payments.

7

Obtain the payment amount from the lender. The payment amount for this loan is $85.97.

8

Calculate the balance of the loan with the formula B = L x (1 + I)^N ' (P / I) x [(1 + I)^N ' 1]. B is the current balance of the loan, L is the principal, I is the interest rate for the payment period, N is the number of payments you have made on the loan and P is the amount of each payment.

9

Assume you wish to know the current balance on a $12,000 loan that requires monthly payments. The monthly interest rate is 0.005, you have already made 117 payments and the amount of each payment is $85.97. The current balance is B = L x (1 + I)^N ' (P / I) x [(1 + I)^N ' 1] = 12,000 x (1 + 0.005)^117 ' (85.97 / 0.005) x [(1 + 0.005)^117 ' 1] = 7,884.12. The current balance on this loan after 117 payments is therefore $7,884.12.