The remaining balance formula is used in order to find the remaining balance on a loan at any given time. For example, in order to determine the final remaining balance on a loan, this specific formula can be used. This formula can be used in the present or to calculate the value at a future date. Finding the remaining balance on a loan can only be used with amortized loans. Amortized loans are a specific type of loan unique to other types. If the interest and principal applied to the loan are predetermined, the remaining balance formula can be utilized.
The Remaining Balance Formula
FV = PV (1+r)^n – P((1+r)^n -1/r), where FV is the future value or remaining balance, PV present value or original balance, P payment, r rate, and n number of payments.
Often time the “future value” can be a difficult concept to understand in terms of the formula and the remaining balance. The balance after the payments have been made is known as the future value. Future value is a value that is estimated to be accurate once the payments have been made. This is an important step in order to achieve a successful loan term. The interest rate and term must relate to each other in order to ensure the loan is paid back on a consistent basis throughout the term. This is the same principle as most financial formulas as it enables structure and accuracy.
It is also important to ensure monthly rates are calculated on a monthly basis, versus an annual basis. This is important as it allows for accurate monthly payments. The remaining balance on a loan is shown for conventional loans. This means that when the payment amount, rate and term are fixed, this type of formula works best. Conventional loans are different in compassion for other types of loans. Some of the qualities of a specialized loan are an option, graduated payment as well as negative amortization. These terms will require special calculations that differ from the overall conventional loan.
Some of the most common uses for the remaining balance formula are consumer loans, mortgages and commercial loans. Consumer loans, mortgages and commercial loans all benefit from the formula to find the accurate balance that remains on the loan term. The amount of funds spent does not have an effect on the calculation of the remaining balance. This is an important factor to understand as it helps the loan to be paid back in accordance with the specific terms set in place.
Solving the equation for the remaining balance formula requires two sections. The first section is the FV of the original. The second section is the FV of the annuity. The variable would be “N” when no payment was made. The second section of the overall formula would be future value. The future value of the payments is calculated up until the “N” variable. The last step is to subtract the FV of payment made from the FV of the original payment balance. This equation can be used simply to determine the overall remaining balance. The most common uses for this formula are mortgages, which allow for a remaining balance to be calculated in order to fully pay back the loan according to the specific loan terms agreed upon.
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