Question 1

How is a monthly loan payment calculated?

Accepted Answer

Monthly payment uses the amortization formula: M = P[r(1+r)^n]/[(1+r)^n-1], where P = principal, r = monthly interest rate (annual rate ÷ 12), n = total months. This calculates a fixed payment that covers interest and reduces principal each month until the loan is paid off.

Question 2

What is the difference between simple and compound interest?

Accepted Answer

Simple interest is calculated only on the principal: I = P × r × t. Compound interest is calculated on principal plus accumulated interest — interest earns interest. Most loans use compound interest, which is why paying early significantly reduces total interest paid.

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