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The monthly payment formula

How a bank works out your payment on a reducing balance.

The formulaPayment = P × r ÷ (1 − (1 + r)⁻ⁿ)r = annual rate ÷ 12n = number of months

Example

Financing 10,000 rials at 6% a year over 5 years:

r0.06 ÷ 12 = 0.005

n5 × 12 = 60

Payment10,000 × 0.005 ÷ (1 − 1.005⁻⁶⁰)

Payment= 193.33 OMR

Total paid193.328 × 60 = 11,599.68

Cost11,599.68 − 10,000 = 1,599.68 OMR

Compare with a flat rate

8,000 rials "at 4% flat" over five years:

Flat profit8,000 × 4% × 5 = 1,600

Payment(8,000 + 1,600) ÷ 60 = 160

True rate≈ 7.4% a year

Nearly double the advertised rate.

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All content on this site is for educational purposes only and is not investment advice or a recommendation. Past performance does not guarantee future results. Consult a licensed adviser before making any investment decision.