Equity-4-U Biweekly Calculation Explanation
Page 1
Detailed Calculations on Biweekly Loans
This document will describe step by step with examples how a biweekly payment
schedule works and how it can help to accelerate payments, save interest and effectively
“lower” your interest rate. To first illustrate the savings we will first start with a simple
example of $30,000 for 5 years (60 months) at an interest rate of 10%.
The first thing to do for both cases is to increase the base loan amount by ½ of a months
interest to find the initial loan amount. This is due to the 45 day grace period which
means your first payment is not due until 45 days after your origination date. To calculate
this increased loan amount, the base amount must be multiplied by one plus ½ the
monthly rate, here 5%. In our $30,000 loan example the base loan amount now becomes
$30,000 x (1 + 5%) = $30,000 x (1 + .05/12) = $30,125.
We must now calculate the base monthly payment which uses the most complicated math
formula used in this discussion. This is the standard monthly payment expressed as:
N
I
I
L
M
−
+
−
×
=
)
1200
/
1
(
1
1200
/
(Equation 1)
Here the letter L represents the loan amount, I represents the annual interest rate, and N
represents the number of months, to give a final monthly payment M. Note that the factor
within the parentheses in the denominator is taken to a negative exponential which can be
a confusing concept for some people. The easy way to think of it is to take the factor
within the parentheses and multiply it by itself N times, and then calculate 1 over that
product as the negative exponential. Most people do not care how it is calculated, and
prefer to just plug it into a calculator, many of which are available on the Internet. The
same formula is also used in most spreadsheets like Microsoft Excel, where it is
calculated using the PMT function. To use Excel simply go to a cell and enter:
=-PMT(I/1200,N,L)
In our example this would be:
=-PMT(10/1200,60,30125)