Loan Constant Calculator

How it is calculated

The tool first finds the level monthly payment of a fully amortizing loan: PMT = L × r ÷ (1 − (1 + r)−n), where L is the loan amount, r is the annual rate ÷ 100 ÷ 12 and n is the term in months. At a 0% rate it uses L ÷ n. Annual debt service is 12 × PMT, and the loan constant is annual debt service ÷ L × 100. All payments are assumed to be equal and monthly, with no interest-only period, balloon or fees. The constant depends only on rate and term, so a larger loan at the same rate and term has the same constant. The loan amount must be above zero, and the term must be a whole number of months from 12 to 1200, because the measure counts twelve payments a year; a shorter or fractional term shows no result.

Common mistakes

• Entering the term in years. The field is in months, so a 25-year loan must be typed as 300; entering 25 treats it as a 25-month loan and gives a constant of 51.45%.
• Confusing the loan constant with the interest rate. At 6.5% the constant is 8.10% because it includes the principal repaid each year, which is why it is higher than the rate.
• Comparing it with a cap rate on a loan that is interest-only. This tool assumes a fully amortizing payment, so an interest-only loan has a lower constant than shown (its constant equals the interest rate).
• Entering a term under 12 months. The tool shows no result, because a constant built on twelve payments a year does not describe a loan that ends sooner.
• Forgetting fees, mortgage insurance and reserve requirements. Only the principal and interest payment is included, so the true cash outflow can be higher.