Suppose your credit card has a balance of $ 8 comma 400 and an annual interest rate of 15%. You decide to pay off the balance over three years. If there are no further purchases charged to the card,
then you can calculate your monthly payments using the formula for an amortizing loan:
PMT = [P r(1+r)^n] / [(1+r)^n - 1]
where:
PMT = monthly payment
P = initial balance ($8,400)
r = monthly interest rate (annual rate / 12 = 0.15 / 12 = 0.0125)
n = number of months (3 years x 12 months = 36 months)
PMT = [8,400 * 0.0125 * (1+0.0125)^36] / [(1+0.0125)^36 - 1]
PMT = [8,400 * 0.0125 * (1.0125)^36] / [(1.0125)^36 - 1]
PMT = [105 * 1.6074] / [1.6074 - 1]
PMT = 168.37 / 0.6074
PMT ≈ $ 277.04
Therefore, your monthly payments to pay off the balance over three years will be approximately $277.04.