Calculation of Principal Reducing Loan
Quick ways to figure out the amount of interest and principal on your principal reducing loan such as asb loan and housing loan over the life of the loan, using math that anyone with a calculator can figure out.
In order to do this right, we need to return to the days of Algebra and assign letter values to different things, in order to calculate the principal reduction on your loan. This is the first step:
P = Principal, the full value of the loan.
I = Interest Rate
L = Length, in years, of your loan.
Supposing the interest is compounded monthly, we can then add two more variables:
R = Monthly interest, as a decimal (I / 1200)
N = # of months it takes to amortize the loan.
What do I do with these variables?
This is where the calculations come into play. The formula is:
M = P * (R / (1 – (1 + R ) ** (or ^) -N))
M is your payment every month. Once you have this, you can start working on how much of it is principal and how much is interest.
So how do I calculate principal reduction on my loan?
Now that we’ve figured out the payment, we need to figure out how you calculate the principal reduction on your loan.
Step 1: S = P * R = This will compute your interest charge every month
Step 2: C = M – S = this is how much of your payment will go to principal every month.
Step 3: Z = P – C = This is your new balance after that principal was paid.
Step 4: Now take Z and make Z = P. Eventually Z and P will amortize their way all the way down to zero, at which point your mortgage has been paid off entirely! Congratulations!
In conclusion, figuring out your interest and principal charges is tricky, but it can be done with a few simple calculations and watch as every month your principal goes down more and more.