What is a Loan?
A loan is an agreement between two parties, where one party (the lender) provides funds to the other party (the borrower) with the expectation that the borrowed funds will be returned, usually with additional payments known as interest.
Loans can be used for a variety of purposes such as purchasing a home (mortgage), buying a car (auto loan), or financing education (student loan).
How does a Payment Calculator Work?
A payment calculator is a tool used to determine the monthly payments on a loan. It uses several inputs:
- Loan amount - The total amount of money borrowed.
- Interest rate - The cost of borrowing, expressed as a percentage of the loan amount.
- Loan term - The length of time you have to repay the loan.
The calculator uses these inputs to compute the monthly payment necessary to repay the loan in full by the end of the term.
What is Interest Rate?
The interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. It's usually specified on an annual basis - known as the Annual Percentage Rate (APR).
Interest rates can be fixed (unchanging for the duration of the loan) or variable (fluctuating with market conditions). A lower interest rate results in lower total cost of the loan.