Understanding Loan Payment Calculation

What is the correct way to calculate the monthly payment on a loan?

Which of the following would not produce the correct monthly payment on a loan of $13,000 which will be paid off in 5 years with an annual interest rate of 6%?

Answer:

The incorrect option is B) =PMT(.5%, 60, -13000) as it does not correctly convert the interest rate to a monthly rate, resulting in an incorrect calculation of the monthly loan payment.

When calculating the monthly payment on a loan, it is important to correctly convert the annual interest rate to a monthly rate. This ensures that the monthly payment is accurately calculated based on the loan amount, interest rate, and loan term.

In the given scenario, option B) =PMT(.5%, 60, -13000) incorrectly uses an annual interest rate of 0.5% without converting it to a monthly rate. This mistake leads to an inaccurate calculation of the monthly loan payment.

To calculate the correct monthly payment, the interest rate should be divided by 12 to get the monthly rate. The number of payments should be the total number of years multiplied by 12 months. The negative of the loan amount is used in the calculation because it represents an outgoing payment.

By using the correct formula and converting the interest rate to a monthly rate, you can accurately determine the monthly payment on a loan.