Remaining Balance on Loan
The formula for the remaining balance on a loan can be used to calculate the remaining balance at a given time(time n), whether at a future date or at present. The remaining balance on a loan formula shown is only used for a loan that is amortized, meaning that the portion of interest and principal applied to each payment is predetermined.
The term "future value" within the remaining balance formula could seem confusing, but the balance at any time after payments are being made is that the future value in reference to the origination of the loan.
It is important, like all financial formulas, that the rate of interest per period and term relate to at least one another and to when the payments are made. With monthly payments, the speed would wish to be the monthly rate and not the annual rate.
Use of Remaining Balance Formula
Using this formula, an easy interest loan will return an incorrect answer in most cases because the portion of principal and interest is decided by the date the payment was made on.
It is also important to notice that the remaining balance on a loan formula shown is merely used for conventional loans where the payment, rate, and term are fixed. Specialized loans like graduating payment, option, and negative amortization would require special calculations to work out the loan balance at a specific time.
The remaining balance on a loan formula are often used with mortgages, consumer loans, and commercial loans. Where the cash is spent doesn't have an affect on the way to calculate the remaining balance on a loan.
How is that the Remaining Balance Formula derived?
The remaining balance of a loan formula are often separated into two sections, the longer term value of the first loan amount and therefore the future value of the annuity.
The future value of the original loan amount in the first section of the formula will determine what the value would be at time n if no payments were made.
A loan is an annuity, in that it is a series of periodic payments. Given this, the second section of the formula would be the future value of the payments made up until time n.
The remaining balance can then be calculated by subtracting the future value of the payments made from the future value of the original balance at time n.
