How to calculate a monthly loan payment
Before you sign for a car loan or a personal loan, two numbers matter: what you pay each month and what the loan costs in total. Lenders like to talk about the first one. This guide shows you how to work out both.
What decides your payment
- Loan amount: how much you borrow.
- Interest rate: the yearly rate the lender charges.
- Term: how many years you take to repay.
An example
You borrow $20,000 at 7% a year for 5 years. Enter those three numbers in the Loan Calculator and you get:
- Monthly payment: $396.02
- Total interest: $3,761.44
- Total paid: $23,761.44
The formula behind it
Fixed-payment loans use this formula, where P is the amount borrowed, r is the monthly rate (the yearly rate divided by 12, written as a decimal) and n is the number of monthly payments:
Payment = P × r ÷ (1 − (1 + r)^−n)
For the example, r is 0.07 ÷ 12 = 0.005833 and n is 60. You do not need to do this by hand, but it helps to know that the rate and the term both sit inside the formula.
A shorter term costs more per month and less overall
Take the same $20,000 at 7%:
- 3 years: $617.54 a month, $2,231.51 total interest
- 5 years: $396.02 a month, $3,761.44 total interest
The 3-year loan costs $221.52 more each month and saves $1,529.93 in interest. A long term makes the monthly payment look affordable while raising the true cost.
A small rate change adds up
At 9% instead of 7%, the 5-year payment is $415.17 and the total interest is $4,910.03. That is $1,148.59 more for a difference of two points, so it pays to compare offers from more than one lender.
Why early payments are mostly interest
Each month, interest is charged on what you still owe. In the first month of the example you owe $20,000, so the interest is 20,000 × 0.005833 = $116.67, and only $279.35 of your payment reduces the debt. As the balance falls, more of each payment goes to the debt. This is why extra payments early in a loan save the most.
Check the APR, not only the rate
The APR includes most lender fees as well as interest, so it shows the cost of a loan more fully than the interest rate does. When you compare two offers, compare the APR and the total paid. This guide is general information, so confirm the final figures with your lender before you sign.