P is your monthly loan payment a is your principal r is your periodic interest rate, which is your interest rate divided by 12 n is the total number of months in your loan term Looking at a long formula can be daunting, so let’s apply it to a loan scenario. Let’s say you take out a $30,000 car loan. Your lender charges you 5% interest, slightly higher than 4.55%, the average as of the end of Q1 2022 for a 60-month loan. Use these figures and calculate your car loan payments. Let’s start by dividing the formula into more manageable parts, X and Y: Next, we’ll calculate for X. Begin by dividing your interest rate by 12 to get r (5% ÷ 12 = 0.0041667) Add 1 (1 + 0.0041667 = 1.0041667) Raise the sum to the total number of months of your loan term (1.004166760 = 1.2833587) Subtract 1 from your current number (1.2833587 - 1 = 0.2833587) X = 0.2833587 Then we’ll compute for Y. Like X, we start with dividing your interest rate by 12 to get r (5% ÷ 12 = 0.0041667) Add 1 (1 + 0.0041667 = 1.0041667) Raise the sum to the total number of months of your loan term (1.004166760 = 1.2833587) Multiply your current figure by r (0.0041667 x 1.2833587 = 0.0053474) Y = 0.0053474 Now, we’ll divide X by Y and refer to the result as Z. 0.2833587 + 0.0053474 = 52.989995. Z = 52.989995 Last, we’ll divide your principal (A) by Z to get your monthly payment (P). 30,000 + 52.989995 = 566.14 P = $566.14 (this is you monthly payment)