Instructions

1.
o 1
Refer to your loan documents. Write down your loan details, including the
amount of the loan, the interest rate and the length of the loan. For example, you
might have a 15-year, $50,000 loan with a 3 percent interest rate.
o 2
Calculate the interest rate per month. As per the example, divide 3 percent by 12
(the number of months in a year). The monthly interest rate is 0.0025 or 0.25
percent. Add one to the monthly interest rate to get 1.0025.
o 3
Calculate the total number of monthly payments. To do this, multiply the length
of the loan by the number of months in a year. In the example, multiply 15 years
by 12 to get 180 total monthly payments.
o 4
Raise the number of the monthly interest rate calculated in Step 2 to the power of
the total monthly payments. For the example, 1.0025 raised to the power of 180 is
1.5674317246679934. If you don't know how to do this, use the exponent
calculator.
o 5
Subtract 1 from the number you have so far. Using the example, subtracting 1
from 1.5674317246679934 equals 0.5674317246679934. Divide the interest rate
per month from this amount. So, 0.0025 divided by 0.5674317246679934 is
0.00440581640278. Now, add that number to the interest rate per month. Adding
0.00440581640278 to 0.0025 equals 0.00690581640279.
o 6
Multiply the number from Step 5 by the principal amount of the loan. From the
example, the product of 0.00690581640279 by $50,000 is $345.29. This is your
monthly payment.
o 7
Calculate the amount of interest you paid on the first payment by multiplying the
principal amount of the loan by the interest rate per month. Still using the
example, $50,000 times 0.0025 equals $125. Subtract this amount from the
monthly payment that you calculated in Step 6. Subtracting $125 from $345.29
equals $220.29. This is the amount that went toward the principal.
o 8
Subtract the amount paid toward the principal in the first payment from the
remaining principal amount. In the example, $50,000 minus $220.29 equals
$49,779.71. This is the remaining principal amount. So, for your first payment of
the reducing balance loan, you paid $220.29 toward the principal and $125 in
interest.
o 9
Repeat Steps 7 and 8 to find the amount of the other payments. Use the remaining
principal balance for the remaining calculations. For the example, the calculations
for the second month's payment will use the remaining principal amount of
$49,779.71 instead of $50,000. The amount of interest paid for the second
payment will be $124.45, and the amount paid to the balance will be $220.84.
Continue to do this for the amount of times of the monthly payments you have
left. For the example, you will do this calculation for 180 payments, reducing the
amount each time.