How to Calculate Loan Payments: Formula, Examples & Calculator (2026)

Whether you're buying a car, consolidating debt, or financing a major purchase, understanding how to calculate loan payments is essential for making informed financial decisions. The monthly payment is often the most important factor when evaluating whether you can afford a loan.

In this comprehensive guide, we'll break down the loan payment formula, walk through real-world examples, and show you how different factors affect your monthly payment. By the end, you'll be able to calculate loan payments confidently and make smarter borrowing decisions.

Understanding Loan Payments: The Basics

A loan payment is the amount you pay to a lender each month to gradually pay off your borrowed money (principal) plus interest charges.

Components of a Loan Payment

Every loan payment consists of two parts:

1. Principal

• The original amount you borrowed
• Portion that reduces your loan balance
• Increases over time in typical amortization

2. Interest

• Cost of borrowing money
• Calculated as percentage of remaining balance
• Decreases over time as balance shrinks

Example: $200 Monthly Payment

Early in loan:
- Principal: $50
- Interest: $150
- Total: $200

Near end of loan:
- Principal: $190
- Interest: $10
- Total: $200

Types of Loans and Payment Structures

Amortizing Loans (most common):

• Fixed monthly payment
• Each payment includes principal + interest
• Loan fully paid off at term end
• Examples: mortgages, auto loans, personal loans

Interest-Only Loans:

• Pay only interest for a period
• Principal payment comes later
• Higher total interest costs
• Less common for consumer loans

Balloon Payment Loans:

• Lower monthly payments
• Large final payment due
• Risky if you can't refinance
• Common in commercial real estate

This guide focuses on amortizing loans with fixed payments—the most common consumer loan type.

The Loan Payment Formula Explained

The standard loan payment formula looks intimidating, but once you understand each component, it's quite logical.

The Formula

M = P × [r(1 + r)^n] / [(1 + r)^n - 1]

Where:
M = Monthly payment
P = Principal (loan amount)
r = Monthly interest rate (annual rate ÷ 12)
n = Number of payments (years × 12)

Breaking Down Each Variable

M (Monthly Payment):

• The amount you'll pay each month
• This is what you're solving for
• Remains constant for fixed-rate loans

P (Principal):

• Total amount borrowed
• Does NOT include interest
• Example: $20,000 loan = P is $20,000

r (Monthly Interest Rate):

• Annual rate divided by 12
• Must be in decimal form
• Example: 6% annual = 6 ÷ 12 ÷ 100 = 0.005

n (Number of Payments):

• Loan term in months
• Years × 12
• Example: 5-year loan = 5 × 12 = 60 payments

Why the Formula Works

The formula accounts for compound interest—you pay interest on interest. Each month:

1. Interest is calculated on remaining balance
2. Your payment covers that interest
3. Remainder reduces principal
4. Next month's interest is calculated on new (lower) balance

This creates an amortization schedule where early payments are mostly interest, and later payments are mostly principal.

Step-by-Step: Calculating a Loan Payment

Let's calculate the monthly payment for a $15,000 personal loan at 8% interest for 4 years.

Step 1: Identify Your Variables

Given information:

• Loan amount (P): $15,000
• Annual interest rate: 8%
• Loan term: 4 years

Step 2: Convert to Monthly Terms

Monthly interest rate (r):

8% annual ÷ 12 months = 0.667% per month
As decimal: 0.08 ÷ 12 = 0.006667

Number of payments (n):

4 years × 12 months = 48 payments

Step 3: Apply the Formula

M = P × [r(1 + r)^n] / [(1 + r)^n - 1]

M = 15,000 × [0.006667(1 + 0.006667)^48] / [(1 + 0.006667)^48 - 1]

Step 4: Calculate Step by Step

Calculate (1 + r):

1 + 0.006667 = 1.006667

Calculate (1 + r)^n:

1.006667^48 = 1.3765

Calculate numerator:

0.006667 × 1.3765 = 0.009177
15,000 × 0.009177 = 137.66

Calculate denominator:

1.3765 - 1 = 0.3765

Calculate final payment:

M = 137.66 / 0.3765 = $365.68

Step 5: Verify Your Answer

Total amount paid:

$365.68 × 48 payments = $17,552.64

Total interest paid:

$17,552.64 - $15,000 principal = $2,552.64

Result: Your monthly payment is $365.68, and you'll pay $2,552.64 in interest over 4 years.

Real-World Loan Payment Examples

Example 1: Auto Loan

Scenario: Buying a used car

Loan details:

• Price: $25,000
• Down payment: $5,000
• Loan amount: $20,000
• Interest rate: 5.5% APR
• Term: 60 months (5 years)

Calculation:

P = $20,000
r = 5.5% ÷ 12 = 0.004583
n = 60 months

M = 20,000 × [0.004583(1.004583)^60] / [(1.004583)^60 - 1]
M = 20,000 × [0.006011] / [1.3110 - 1]
M = 120.22 / 0.3110
M = $386.61

Results:

• Monthly payment: $386.61
• Total paid: $23,196.60
• Total interest: $3,196.60
• Interest as % of principal: 16%

Example 2: Personal Loan (Debt Consolidation)

Scenario: Consolidating $10,000 in credit card debt

Loan details:

• Loan amount: $10,000
• Interest rate: 12% APR
• Term: 36 months (3 years)

Calculation:

P = $10,000
r = 12% ÷ 12 = 0.01
n = 36 months

M = 10,000 × [0.01(1.01)^36] / [(1.01)^36 - 1]
M = 10,000 × [0.01430] / [1.4308 - 1]
M = 143.0 / 0.4308
M = $332.14

Results:

• Monthly payment: $332.14
• Total paid: $11,957.04
• Total interest: $1,957.04
• Interest as % of principal: 19.6%

Comparison to credit cards: If you kept the debt on credit cards at 18% APR making minimum payments, you'd pay over $5,000 in interest. Consolidation loan saves $3,000+.

Example 3: Student Loan

Scenario: Federal student loan repayment

Loan details:

• Loan amount: $30,000
• Interest rate: 6.8% APR (typical federal rate)
• Term: 120 months (10 years - standard repayment)

Calculation:

P = $30,000
r = 6.8% ÷ 12 = 0.005667
n = 120 months

M = 30,000 × [0.005667(1.005667)^120] / [(1.005667)^120 - 1]
M = 30,000 × [0.01115] / [1.9684 - 1]
M = 334.5 / 0.9684
M = $345.38

Results:

• Monthly payment: $345.38
• Total paid: $41,445.60
• Total interest: $11,445.60
• Interest as % of principal: 38.2%

Alternative: 20-year repayment

• Monthly payment: $228.22
• Total interest: $24,772.80
• Trade-off: Lower monthly payment but pay 116% more interest ($13,327 extra)

Example 4: Home Improvement Loan

Scenario: Renovating a kitchen

Loan details:

• Loan amount: $50,000
• Interest rate: 7.5% APR
• Term: 84 months (7 years)

Calculation:

P = $50,000
r = 7.5% ÷ 12 = 0.00625
n = 84 months

M = 50,000 × [0.00625(1.00625)^84] / [(1.00625)^84 - 1]
M = 50,000 × [0.01083] / [1.7333 - 1]
M = 541.5 / 0.7333
M = $738.42

Results:

• Monthly payment: $738.42
• Total paid: $62,027.28
• Total interest: $12,027.28
• Interest as % of principal: 24%

How Loan Terms Affect Your Payment

Understanding how changing loan variables impacts your payment helps you make better borrowing decisions.

Impact of Loan Amount (Principal)

Example: Auto loan at 6% for 5 years

| Loan Amount | Monthly Payment | Total Interest | |-------------|-----------------|----------------| | $15,000 | $289.99 | $2,399.40 | | $20,000 | $386.66 | $3,199.60 | | $25,000 | $483.32 | $3,999.20 | | $30,000 | $579.98 | $4,798.80 |

Key insight: Doubling the loan amount doubles the monthly payment AND doubles total interest paid.

Takeaway: Larger down payments significantly reduce your borrowing costs.

Impact of Interest Rate

Example: $20,000 loan for 5 years

| Interest Rate | Monthly Payment | Total Interest | Difference from 5% | |---------------|-----------------|----------------|-------------------| | 3% | $359.37 | $1,562.20 | -$1,637 | | 5% | $377.42 | $2,645.20 | Baseline | | 7% | $396.02 | $3,761.20 | +$1,116 | | 9% | $415.17 | $4,910.20 | +$2,265 | | 12% | $444.89 | $6,693.40 | +$4,048 |

Key insight: Each 1% increase in interest rate costs $10-20 more per month, but $800-1,200 more over the loan life.

Takeaway: Even small interest rate differences have huge long-term impact. Improve your credit score before applying!

Impact of Loan Term

Example: $25,000 loan at 8%

| Loan Term | Monthly Payment | Total Interest | Interest as % of Principal | |-----------|---------------|----------------|---------------------------| | 2 years | $1,129.83 | $2,115.92 | 8.5% | | 3 years | $783.53 | $3,207.08 | 12.8% | | 4 years | $609.96 | $4,278.08 | 17.1% | | 5 years | $506.91 | $5,414.60 | 21.7% | | 7 years | $387.85 | $7,620.20 | 30.5% |

Key insights:

• Doubling loan term from 3 to 6 years cuts payment by ~40%
• But nearly DOUBLES total interest paid
• Shorter terms = higher payments but massive interest savings

Takeaway: Choose the shortest term you can comfortably afford to minimize interest costs.

Amortization: How Your Payment Breaks Down Over Time

Every fixed loan payment stays the same amount, but the split between principal and interest changes each month.

Amortization Schedule Example

$20,000 loan at 7% for 5 years (Monthly payment: $396.02)

| Payment # | Principal | Interest | Balance | |-----------|-----------|----------|---------| | 1 | $279.35 | $116.67 | $19,720.65 | | 6 | $284.83 | $111.19 | $18,288.47 | | 12 | $291.69 | $104.33 | $16,726.60 | | 24 | $307.58 | $88.44 | $13,243.60 | | 36 | $324.91 | $71.11 | $9,486.58 | | 48 | $343.24 | $52.78 | $5,509.96 | | 60 | $393.74 | $2.28 | $0.00 |

Observations:

• Month 1: 70% goes to principal, 30% to interest
• Month 24 (midpoint): Split is 78% principal / 22% interest
• Month 60 (last payment): 99% principal, 1% interest

Why Early Payments Are Mostly Interest

It's all about the balance:

Month 1:

• Balance: $20,000
• Monthly rate: 0.583%
• Interest charged: $20,000 × 0.00583 = $116.67
• Remaining for principal: $396.02 - $116.67 = $279.35

Month 30:

• Balance: $10,500
• Monthly rate: 0.583%
• Interest charged: $10,500 × 0.00583 = $61.22
• Remaining for principal: $396.02 - $61.22 = $334.80

As your balance decreases, interest charges shrink, so more of each payment goes to principal.

Making Extra Payments

Power of extra principal payments:

Using the same $20,000 loan, if you pay an extra $50/month:

• Original payoff: 60 months
• New payoff: 50 months (10 months sooner!)
• Interest saved: $892

Even better: Extra $100/month

• Payoff: 43 months (17 months sooner!)
• Interest saved: $1,574

Comparing Loan Offers: What to Look For

When shopping for loans, monthly payment isn't the only factor. Here's how to compare options effectively.

APR vs. Interest Rate

Interest Rate:

• Base cost of borrowing
• Doesn't include fees

Annual Percentage Rate (APR):

• Interest rate PLUS fees
• True cost of borrowing
• Always use APR to compare loans

Example comparison: | Lender | Interest Rate | Fees | APR | Monthly Payment | |--------|--------------|------|-----|----------------| | Lender A | 7.0% | $0 | 7.0% | $396.02 | | Lender B | 6.75% | $600 | 7.2% | $394.96 |

Lender A has a higher rate but no fees, making it the better deal despite Lender B's lower advertised rate.

Total Cost Comparison

$25,000 loan - 60 months

| Lender | APR | Monthly Payment | Total Paid | Total Interest | |--------|-----|-----------------|------------|----------------| | Credit Union | 5.5% | $477.53 | $28,651.80 | $3,651.80 | | Online Lender | 7.0% | $495.03 | $29,701.80 | $4,701.80 | | Bank | 9.0% | $518.96 | $31,137.60 | $6,137.60 |

Key insight: 3.5% rate difference (5.5% vs 9%) costs an extra $2,485 over the loan term!

Takeaway: Shop around. Spending 2-3 hours comparing lenders can save thousands.

Hidden Fees to Watch For

Origination fees: 1-6% of loan amount upfront Prepayment penalties: Fee for paying off early Late payment fees: Typically $25-50 per late payment Annual fees: Some personal loans charge yearly fees Application fees: Should be refunded if not approved

Red flags:

• Fees over 5% of loan amount
• Any prepayment penalties
• Unclear or excessive fees

Using a Loan Payment Calculator

While understanding the formula is valuable, a loan calculator saves time and eliminates calculation errors.

Our Free Loan Payment Calculator

Calculate Your Loan Payment

Features:

• Instant monthly payment calculation
• Complete amortization schedule
• Total interest breakdown
• Comparison tools for different scenarios
• Mobile-friendly interface

How to Use the Calculator Effectively

Step 1: Enter Basic Information

• Loan amount
• Interest rate (APR)
• Loan term in years

Step 2: Review Results

• Monthly payment amount
• Total interest over loan life
• Total amount paid
• Amortization schedule

Step 3: Compare Scenarios

• Try different loan terms
• Adjust interest rates
• See impact of extra payments
• Compare multiple loan offers side-by-side

Step 4: Make Informed Decision

• Choose the loan with lowest total cost
• Verify you can afford monthly payment
• Consider emergency fund buffer

Strategies to Lower Your Loan Payment

1. Increase Your Down Payment

Example: $25,000 car purchase at 6% for 5 years

| Down Payment | Loan Amount | Monthly Payment | Savings | |--------------|-------------|-----------------|---------| | $0 | $25,000 | $483.32 | — | | $2,500 (10%) | $22,500 | $434.99 | $48.33/mo | | $5,000 (20%) | $20,000 | $386.66 | $96.66/mo | | $7,500 (30%) | $17,500 | $338.33 | $144.99/mo |

Pro tip: Every $1,000 down payment reduces monthly payment by ~$19 (at 6% for 5 years).

2. Improve Your Credit Score

Rate impact by credit score ($20,000 loan for 5 years):

| Credit Score | Typical Rate | Monthly Payment | Total Interest | |--------------|--------------|-----------------|----------------| | 760+ (Excellent) | 5.0% | $377.42 | $2,645 | | 700-759 (Good) | 7.0% | $396.02 | $3,761 | | 660-699 (Fair) | 10.0% | $424.94 | $5,496 | | 620-659 (Poor) | 14.0% | $465.29 | $7,917 |

Savings from improving credit score from 660 to 760:

• Monthly: $47.52 less
• Over 5 years: $2,851 saved

Quick credit improvements (30-90 days):

• Pay down credit card balances below 30% utilization
• Dispute any errors on credit reports
• Don't close old credit accounts
• Pay all bills on time

3. Choose a Longer Loan Term

$20,000 loan at 7% APR:

| Term | Monthly Payment | Total Interest | Trade-off | |------|-----------------|----------------|-----------| | 3 years | $617.54 | $2,231 | High payment, low interest | | 5 years | $396.02 | $3,761 | Moderate payment & interest | | 7 years | $297.60 | $4,999 | Low payment, high interest |

When longer terms make sense:

• Tight monthly budget
• Other high-priority debt to pay off
• Emergency fund needs building
• Variable income situation

Caution: Longer terms mean paying significantly more interest overall.

4. Refinance Later

If you can't get a great rate now, consider:

Initial loan strategy:

• Accept current rate to get the loan
• Make on-time payments for 12-24 months
• Improve credit score during this time
• Refinance to lower rate later

Example scenario:

• Original: $20,000 at 10% for 5 years = $424.94/month
• After 1 year: Refinance remaining $16,800 at 7% for 4 years = $402.08/month
• Savings: $22.86/month + lower total interest

5. Make Bi-Weekly Payments

Instead of monthly payments, pay half every two weeks:

$20,000 loan at 7% (normally $396.02/month for 5 years):

• Bi-weekly payment: $198.01
• You make 26 payments/year instead of 12
• Equivalent to 13 monthly payments instead of 12
• Payoff time: 4 years, 5 months (7 months sooner)
• Interest saved: $724

How it works: By paying half every 2 weeks, you make one extra full payment per year, accelerating payoff.

Frequently Asked Questions

What if I miss a loan payment?

Immediate consequences:

• Late fee charged (typically $25-50)
• After 30 days, reported to credit bureaus
• Credit score drops 50-100 points
• Additional interest accrues

What to do:

• Contact lender immediately before due date
• Many lenders offer one-time courtesy extensions
• Explain situation and request payment plan
• Never ignore missed payment—it only gets worse

Can I pay off my loan early?

Most loans allow early payoff, but check for prepayment penalties. If no penalty:

Benefits of early payoff:

• Save on interest charges
• Eliminate debt faster
• Improve debt-to-income ratio
• Free up monthly cash flow sooner

How to pay off early:

• Make extra principal payments
• Pay bi-weekly instead of monthly
• Apply windfalls (tax refunds, bonuses) to principal
• Round up payments (pay $400 instead of $386)

How do I calculate interest paid on a loan?

Total interest formula:

Total Interest = (Monthly Payment × Number of Payments) - Principal

Example: $386.66/mo × 60 payments = $23,200
$23,200 - $20,000 principal = $3,200 interest

Or use our Loan Payment Calculator which shows:

• Total interest paid
• Interest paid each month
• Principal reduction each payment
• Complete amortization schedule

What's better: low rate with fees or higher rate with no fees?

Compare using APR (Annual Percentage Rate), which includes fees.

Example: $20,000 loan for 5 years

Option A:

• Rate: 6%
• Fees: $800
• APR: 6.85%
• Monthly payment: $389.63
• Total cost: $24,177.80

Option B:

• Rate: 6.5%
• Fees: $0
• APR: 6.5%
• Monthly payment: $392.99
• Total cost: $23,579.40

Option B wins by $598 despite higher rate!

Rule of thumb: If fees exceed 1% of loan amount, choose the no-fee option unless the rate difference is substantial.

How much loan can I afford?

Safe lending rule: 28/36 Rule

28% Rule: Housing costs (including loans) shouldn't exceed 28% of gross monthly income

36% Rule: Total debt payments shouldn't exceed 36% of gross monthly income

Example: $5,000 monthly gross income

• Maximum for housing/mortgage: $1,400 (28%)
• Maximum for all debt: $1,800 (36%)
• Available for other loans: $400/month

Additional factors:

• Emergency fund (3-6 months expenses)
• Other financial goals (retirement, kids' college)
• Job stability and income predictability
• Variable expenses (car repairs, medical)

Conservative approach: Only borrow what you can pay off in 3-5 years with payments under 15% of take-home income.

Ready to Calculate Your Loan Payment?

Now that you understand how loan payments work, it's time to run the numbers for your specific situation.

Use Our Free Calculator

Calculate Your Loan Payment Now

Our calculator helps you:

• Calculate monthly payments instantly
• Compare different loan terms side-by-side
• See complete amortization schedules
• Determine total interest costs
• Find the best loan option for your budget

Before You Borrow: Checklist

• [ ] Calculate monthly payment you can afford
• [ ] Check your credit score (aim for 700+)
• [ ] Compare offers from 3-5 lenders
• [ ] Review APR, not just interest rate
• [ ] Check for prepayment penalties
• [ ] Verify all fees are disclosed
• [ ] Choose shortest term you can afford
• [ ] Ensure emergency fund covers 3+ months of payments

Related Articles

• How Long to Pay Off Credit Card Debt
• When Should You Refinance Your Mortgage
• Mortgage Amortization Schedule Explained
• How Extra Mortgage Payments Save Money

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Remember: The best loan is one you can comfortably afford with the lowest total cost. Don't just focus on monthly payment—consider the total interest you'll pay over the life of the loan. Use our calculator, compare multiple options, and choose wisely.

Start calculating your loan payment today with our Free Loan Payment Calculator!