How to Compute Loan Interest and Monthly Amortization in the Philippines?

22 May 2023
How to Compute Loan Interest and Monthly Amortization in the Philippines

Ever wondered how to calculate personal loans' interest and monthly amortization in the Philippines?


Loan interest and amortization are determined by various factors, including the loan amount, duration, and interest rates. Understanding how to calculate these can help you manage your finances effectively and avoid missed or late payments.


So, buckle up and become a loan interest and amortization whiz. This comprehensive guide will help you break down the formulas, explain the factors that come into play, and even throw in some real-life examples. 



The Importance of Computing Loan Interest and Monthly Amortization

Computing loan interest and monthly amortization is not just a technical exercise but a vital step in responsible borrowing. It allows you to budget effectively, make decisions, and assess affordability. 


Moreover, it also provides predictability and stability in loan repayments while offering opportunities for early repayment strategies. Thus, you can navigate the borrowing landscape with confidence and achieve your financial goals while maintaining control over your financial well-being.



What are Loan Interest Rates?

Loan interest refers to the additional amount borrowers must pay besides the principal amount borrowed. It is the cost of borrowed money from a lender and is typically expressed as a percentage of the loan amount. 


However, there are also different types of interest rates. These are: 


  • Fixed Interest Rate. The interest is the same until the loan ends, providing predictable and stable monthly payments.

  • Variable Interest Rate. The interest changes depending on market conditions or a specified benchmark rate, leading to potential changes in monthly payments.

  • Adjustable Rate. This combines features of both fixed and variable rates. It starts with a fixed rate period and then transitions to a variable rate period.

  • Prime Rate. It is the interest rate charged by commercial banks to their most creditworthy customers. It serves as a benchmark for loans with variable interest rates.

  • Annual Percentage Rate (APR). This represents the total borrowing cost, including interest and applicable fees. It helps borrowers compare loan offers more easily.



How are Loan Interest Rates Calculated?

Most financial institutions use two different types of methods - simple interest and compound interest computation. Hence, it would be ideal to review the loan documentation and consult with the lender for precise details on interest calculation.



1. Simple Interest. Simple interest is computed based on the initial principal amount borrowed. The formula for simple interest is: (Principal Amount) x (Interest Rate) x (Time).

For example, if you borrow PHP 10,000 with a five (5) percent annual interest rate for two (2) years, the simple interest paid would be: Interest = 10,000 x 0.05 x 2 = PHP 1,000. Therefore, the total amount to be repaid would be PHP 11,000.



2. Compound Interest. Compound interest takes into account both the initial principal amount and the accumulated interest over time. It is calculated based on compounding periods, which can be annually, semi-annually, quarterly, or monthly, depending on the terms of the loan. The formula for compound interest is: Principal (1 + r/n)^(nt).


For example, if you borrow PHP 10,000 with a five (5) percent annual interest rate compounded annually for 2 years, the compound annual interest rate divided by would be: A = 10,000(1 + 0.05/1)^(1x2) = PHP 10,000(1.05)^2 = PHP 11,025. Therefore, the total amount to be repaid would be PHP 11,025.



What is Monthly Amortization?

On the other hand, monthly amortization refers to the fixed amount that borrowers are required to repay each month to gradually pay off a loan over its specified term. It includes both the outstanding principal balance or amount borrowed and the accrued interest.


When a loan is taken out, the total loaned amount is divided into equal monthly installments, considering the loan term and interest rate. Each monthly payment made by the borrower consists of a portion that goes towards reducing the principal amount or outstanding loan balance and another portion that covers the accrued interest for that month.



How is monthly amortization calculated?

The monthly amortization can be calculated using the following formula: Monthly Amortization = (Loan Amount) x (Monthly Interest Rate) / (1 - (1 + Monthly Interest Rate)^(-Total Number of Months)).


For example, let's assume the actual cost of your loan amount is PHP 100,000 with a 6% annual interest rate over a period of 3 years (36 months). With the monthly interest rate calculated as 0.5%, plugging in these values yields a monthly amortization of approximately PHP 4,992.59.


However, you must know that actual loan terms may differ. So, it is recommended to consult with their lenders, especially if you’re taking out a loan for a house and lot Philippines. You can also use specialized loan calculators for accurate amortization figures tailored to their specific loan arrangements.



How to Use Online Loan Calculators Effectively?

You can utilize an online loan calculator to evaluate loan options and estimate monthly payments. So, gain a better understanding of the overall cost of borrowing by considering these tips.



Understand your loan details.

Before using the online loan calculator, gather all the necessary information about your loan. Whether it is a personal loan, housing loan, or car loan, ensure you know the loan amount, loan term, interest rate, and any additional fees or charges.



Choose a reliable online calculator.

Look for reputable financial websites, lending institutions, or loan comparison platforms that provide reliable and user-friendly online loan calculators. Ensure that the calculator offers the necessary features to calculate the specific type of loan you are considering.



Input accurate information.

Enter the loan details accurately into the calculator. Double-check the loan amount, interest rate, loan term, and any other relevant information to avoid any errors that could affect the calculated results.



Select the appropriate calculation for monthly payments and loan term.

Depending on the calculator, you may have options to calculate monthly payments, interest costs, amortization schedules, or other relevant parameters, such as stating your gross monthly income. Thus, choose the calculation that suits your needs.



Utilize additional features.

Some loan calculators offer additional features like comparing different loan offers, factoring in extra payments, or providing an amortization schedule. Explore these features to gain more insights into your loan and repayment options.



Interpret the results.

Once you have calculated the loan details, carefully review the results provided by the calculator. Pay attention to the monthly payments, total interest cost, and other relevant figures to understand the financial implications of the loan.



Consider other factors of your loan amount.

While the online calculator provides valuable information, remember to consider other factors that could impact your borrowing decision. These factors may include your income, existing debts, financial goals, and the affordability of the loan payments within your budget.



Lumina Homes recognized the importance of using loan calculators for homebuyers as it helps you determine your housing loan interest and monthly amortization. To ensure transparency about our affordable house and lot for sale total cost, we provide a loan calculator online via our official website. If you want to explore how much you can pay for your preferred affordable house and lot, feel free to use this feature for added convenience of your future investment.

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Disclaimer: All computation appearing herein are sample computation only and are not official.
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