What is a Loan?
A loan is money borrowed from a financial institution, repaid in installments with interest over a fixed period. Common types include home loans, car loans, and personal loans.
How Installments Are Calculated
Monthly payments use the PMT formula: Payment = P × r / (1 − (1 + r)^−n) where P = principal, r = monthly rate, n = number of payments.
Reducing Balance vs Flat Rate
Reducing Balance — interest on remaining principal, common for mortgages. Flat Rate — interest on original principal, common for car loans.
Factors Affecting Payments
- Loan amount — higher = higher payments
- Interest rate — higher = more total interest
- Term — longer = lower payments but more interest
- Down payment — more down = less borrowed