A fixed principal loan is a type of loan where the borrower repays a fixed amount of the principal loan amount each period, until the loan is fully paid off. The interest on the loan is calculated based on the outstanding principal balance, which decreases over time as the borrower makes principal payments.
In contrast, a traditional loan with fixed payments typically has a fixed payment amount that includes both principal and interest, so the amount of principal paid each period may vary depending on the interest rate and the remaining term of the loan.
Fixed principal loans are often used for business loans or other types of loans where the borrower expects to have a steady stream of income over time and wants to ensure that they can pay off the loan on a fixed schedule. They can also be useful for borrowers who want to reduce their total interest payments by paying off the loan faster.
Additional instructions for the fixed principal calculator
Enter the four primary inputs:
- Loan Amount: Enter the total amount of the loan you wish to take out. This should be entered as a positive number.
- Number of Payments: Enter the total number of payments you will make to pay off the loan. This should be entered as a positive whole number.
- Annual Interest Rate: Enter the annual interest rate for the loan, expressed as a percentage. For example, if the annual interest rate is 5%, you would enter "5" for this field.
- Payment Amount: Enter the amount of each payment you will make to pay off the loan. This should be entered as a positive number.
Note: You may enter 3 of the 4 values (Loan Amount, Number of Payments, Annual Interest Rate, Payment Amount) and leave one value as 0, and the calculator will calculate the unknown value based on the entered values.
These secondary inputs must all be set. If you are not sure about any of them, we suggest that you leave them set to their default setting.
- Payment Frequency: Select the frequency of payments you will make to pay off the loan. This can be monthly, bi-weekly, weekly, or other intervals.
- Compounding: Select the compounding frequency of the loan. This is the frequency at which the interest is calculated and added to the loan balance. If the loan documents do not specify a compounding frequency or you don't know it, then set it to be the same as the payment frequency.
- Payment Method: Select the payment method you will use to pay off the loan. If the first payment is due when the loan originates set this option to "Advance." Otherwise, we'll assume the first payment is due one period after the origination date (when the funds are available) and in that case, this must be set to "Arrears."
A fixed principal payment loan has a declining payment amount. That is, unlike a typical loan, which has a level periodic payment amount, the principal portion of the payment is the same payment to payment, and the interest portion of the payment is less each period due to the declining principal balance. Thus the payment amount declines from one period to the next. Ultimately, the borrower will pay less in interest charges with this loan method.
This calculator will solve for any one of four possible unknowns: "Amount of Loan," "Number of Payments" (term), "Annual Interest Rate" or the "Periodic Payment."
Enter a '0' (zero) for one unknown value.
The term (duration) of the loan is a function of the "Number of Payments" and the "Payment Frequency." If the loan is calling for monthly payments and the term is four years, then enter 48 for the "Number of Payments." If the payments are made quarterly, and the term is ten years, then enter 40 for the "Number of Payments."
Normally you would set the "Payment Method" to "Arrears" for a loan. Arrears means that the monies are lent on one day, and the first payment isn't due until one period after the funds are received.
If the first payment is due on the day the funds are available, then set "Payment Method" to "Advance." This is typical for leases.