A monthly loan payment is a predetermined amount of money the borrower agrees to pay the lender on a specific date each month. In most cases, monthly payments are evenly distributed over the life of the loan, thus making the loan easier to pay off.
Monthly loan payments are a common feature of many installment loans, and the term is sometimes used interchangeably with installment loan payments. However, there is a big difference. Not all installment loans are paid monthly. In fact, some are paid weekly or biweekly.
Many lenders schedule monthly loan payments for the first business day of a given month, especially mortgage loans. But monthly loan payments can be set for any day agreed upon by both parties. Other common dates include the 15th, 28th and 30th. Some lenders will also arrange to have monthly loan payment due dates scheduled for the borrower’s employment pay date.
A monthly loan payment typically consists of payments for two loan elements: principle and interest.
The actual loan payment amount is typically calculated through amortization. The amortization page provides a thorough explanation of the amortization formula. From the monthly loan payment perspective, amortization produces the following result:
For example, consider the sample loan amortization schedule below for a one-year personal loan of $10,000 with a 10% interest rate.
|Payment Number||Loan Payment Amount||Payment Toward Principal||Payment Toward Interest||Principal Balance||Percent of Payment to Principal||Percent of Payment to Interest|
As you can see, about 9.478% of the initial monthly loan payment went toward interest charges. By the 12th (and last) loan payment, the interest portion accounted for less than one percent of the entire monthly payment – while more than 99% of the last payment was going toward principal.
To shorten the loan term and save on interest charges, many borrowers will pay more toward the principal, in addition to the scheduled monthly payment. Loan principal prepayments will lower the principal balance faster, which means that less interest will be due.
Early prepayments are common with commercial loans. Some consumer loan providers and mortgage lenders do charge a prepayment penalty on consumer loans and mortgage financing for individuals. Many states, however, place limits on prepayment penalties for many home and consumer loans. Direct personal loan lenders like NetCredit do not charge any prepayment fees if the borrower decides to pay off the loan early, either in part or in full.
Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.