1. Standard Reducing Balance Amortization Formula

For standard amortizing loans (such as home mortgages, vehicle loans, and personal installment credit), the periodic payment M is calculated using the annuity formula:

M = P × [ r(1 + r)^n ] / [ (1 + r)^n – 1 ]

Where:

  • P: Principal loan amount borrowed.
  • r: Periodic interest rate (Annual Nominal Rate ÷ Number of payment periods per year).
  • n: Total number of payment periods (e.g., 3 years monthly = 36 periods).

2. Simple Flat Interest Formula

For simple flat interest rate financing (often quoted for consumer electronics and motorcycle loans):

Total Interest = P × Annual Flat Rate × Duration (Years)\nMonthly Installment = (P + Total Interest) ÷ Total Months

Educational Observation: Because flat interest is calculated on the initial principal for the full life of the loan regardless of repayments made, the equivalent effective APR is approximately 1.8x to 1.9x the stated flat rate.

3. Debt-to-Income (DTI) Ratio

Debt-to-Income percentage evaluates recurring monthly debt obligations against gross income:

DTI (%) = (Total Monthly Debt Obligations ÷ Gross Monthly Income) × 100

4. Compound Interest & Future Value

For recurring monthly savings growth compounding monthly:

FV = P(1 + r/n)^(nt) + PMT × [ ((1 + r/n)^(nt) - 1) / (r/n) ]