Question 1

How is loan payment calculated?

Accepted Answer

Loan payment is calculated using the amortization formula: M = P[r(1+r)^n]/[(1+r)^n-1], where M is monthly payment, P is principal loan amount, r is monthly interest rate (annual rate divided by 12), and n is total number of payments (loan term in years × 12). This formula ensures the loan is fully paid off with equal monthly payments.

Question 2

What is the difference between fixed and variable rate loans?

Accepted Answer

Fixed-rate loans have an interest rate that remains constant throughout the loan term, providing predictable monthly payments. Variable (or adjustable) rate loans have rates that change periodically based on market conditions, which can result in lower initial rates but payment uncertainty. Fixed rates are better for long-term stability; variable rates may save money if rates decrease.

Question 3

Should I make extra loan payments?

Accepted Answer

Making extra payments can significantly reduce total interest and shorten loan term. Extra payments go directly toward principal, reducing the balance faster. This is most beneficial for high-interest loans. However, consider: 1) Check for prepayment penalties, 2) Ensure you have an emergency fund first, 3) Compare with other investment opportunities, and 4) Consider paying off highest-interest debts first.

Question 4

What factors affect my loan interest rate?

Accepted Answer

Key factors include: 1) Credit score (higher scores get lower rates), 2) Loan amount and term (larger amounts and longer terms may have higher rates), 3) Down payment or loan-to-value ratio, 4) Income and debt-to-income ratio, 5) Type of loan and collateral, 6) Current market rates, and 7) Lender policies. Improving these factors before applying can help secure better rates.

Question 5

How much can I afford to borrow?

Accepted Answer

Use the 28/36 rule: monthly loan payments should not exceed 28% of gross monthly income, and total debt payments should not exceed 36%. Calculate affordable payment: Monthly Income × 0.28 = Maximum Housing Payment. Consider all monthly obligations, emergency savings, and financial goals. The calculator helps determine loan amount based on comfortable monthly payment and available terms.

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