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The time value of money is one of the most basic concepts used in financial theory, especially when determining the value of a stream of cash flows. There are numerous calculators available online to help with making this calculation. The challenge is identifying the right variables to use.
Determine the interest rate paid on the loan. Ask the loan adviser or look on the documents if you do not know.
Determine the number of payment periods for which you will have the loan. Let's say you have the loan for five years at a rate of 8 percent.
Determine the future value. In order to compute the present value, you need to have a future value. The future value is the amount you have to pay once the loan is completely paid off, including interest payments. You can find this information on your amortization or loan schedule or by looking on your loan documents. Your loan adviser or loan servicer will also be able to help you with this if the paperwork isn't handy. Let's say the future value of the loan is $18,000.
Input these variables into a present-value calculator (such as the one provided by Investopedia; see Resources) to determine the present value of your loan. You can also use a financial calculator and the present value of a lump-sum function. The present value of the loan is $12,250.50.
References
- Investopedia: Anything But Ordinary: Calculating The Present And Future Value Of Annuities
- Debt.org. "What Is a Loan Agreement?" Accessed Oct. 23, 2020.
- U.S. Department of Education Federal Student Aid. "The Standard Repayment Plan is the basic repayment plan for loans from the William D. Ford Federal Direct Loan (Direct Loan) Program and Federal Family Education Loan (FFEL) Program." Accessed Oct. 23, 2020.
- Corporate Finance Institute (CFI). "Amortization Schedule." Accessed Oct. 23, 2020.
- Consumer Financial Protection Bureau. "What is a prepayment penalty?" Accessed Oct. 23, 2020.
- Consumer Financial Protection Bureau. "Loan Estimate and Closing Disclosure: Your guides in choosing the right home loan." Accessed Oct. 23, 2020.
- Consumer Financial Protection Bureau. "What is a balloon payment? When is one allowed?" Accessed Oct. 23, 2020.
- Accion.org. "2 Different Types of Personal Guarantees Your Business Needs to Understand." Accessed Oct. 23, 2020.
- Consumer Financial Protection Bureau. "Know what is negotiable." Accessed Oct. 23, 2020.
Resources
Writer Bio
Working as a full-time freelance writer/editor for the past two years, Bradley James Bryant has over 1500 publications on eHow, LIVESTRONG.com and other sites. She has worked for JPMorganChase, SunTrust Investment Bank, Intel Corporation and Harvard University. Bryant has a Master of Business Administration with a concentration in finance from Florida A&M University.