How loan payments are calculated
Most personal loans, car loans and mortgages are amortising loans: you pay the same amount every month, and each payment covers that month's interest first, with the rest reducing the balance. Early payments are mostly interest; later ones are mostly principal. The fixed payment is found with the standard annuity formula:
Payment = P × r ÷ (1 − (1 + r)^−n)
P = amount borrowed, r = annual rate ÷ 12, n = number of monthly payments
Each month, interest = current balance × r, and principal repaid = payment − interest.
Worked example
You borrow 20,000 at 6% a year for 5 years (60 payments). The monthly rate is 0.06 ÷ 12 = 0.005.
Payment = 20,000 × 0.005 ÷ (1 − 1.005^−60) = 386.66
- Total paid: 386.66 × 60 = 23,199.36
- Total interest: 23,199.36 − 20,000 = 3,199.36
- First month: interest 20,000 × 0.005 = 100.00, so 286.66 goes to the balance.
What changes the cost of a loan
- Interest rate: the biggest factor. Even one percentage point makes a noticeable difference over several years.
- Term: a longer term lowers the monthly payment but increases the total interest, because you borrow the money for longer.
- Extra payments: anything paid on top of the required payment reduces the balance directly, so every later month charges less interest. The calculator shows how many months and how much interest an extra payment saves.
- Fees: arrangement fees and insurance add to the cost but are not part of the formula. Compare offers by their APR (annual percentage rate), which includes most mandatory fees.
APR versus interest rate
The nominal interest rate is what this calculator uses to work out the payment. The APR expresses the total yearly cost including compulsory fees, which is why lenders in many countries are required to show it. Two loans with the same interest rate can have different APRs if one charges a bigger arrangement fee.
Before you borrow
- Check that the monthly payment fits your budget with room to spare for unexpected costs.
- Ask whether early repayment is allowed and whether there is a fee for it.
- For a variable-rate loan, this calculation only holds while the rate stays the same.
- For home loans with property tax, insurance and a down payment, use the mortgage calculator.
Common mistakes
- Dividing total interest by the number of months. Interest is not spread evenly; it is charged on the remaining balance each month.
- Comparing loans by monthly payment only. A lower payment over a longer term often costs more in total.
- Entering a monthly rate as the annual rate. Enter the yearly rate; the calculator divides by 12.
This calculator assumes a fixed rate, monthly payments and interest calculated monthly. Real loan agreements may differ; check the figures with your lender.
The first months of the schedule
For the example loan of 20,000 at 6% over 5 years (payment 386.66):
| Month | Interest | Principal | Balance |
|---|---|---|---|
| 1 | 100.00 | 286.66 | 19,713.34 |
| 2 | 98.57 | 288.09 | 19,425.25 |
| 3 | 97.13 | 289.53 | 19,135.71 |
Each month the interest falls slightly because the balance is lower, so a little more of the same payment goes towards the principal.
How the rate changes the cost
Same loan, 20,000 over 5 years, at different rates:
| Rate | Monthly payment | Total interest |
|---|---|---|
| 4% | 368.33 | 2,099.83 |
| 6% | 386.66 | 3,199.36 |
| 8% | 405.53 | 4,331.67 |
| 10% | 424.94 | 5,496.45 |
Each two percentage points add roughly 1,100 to 1,200 of interest here, which is why shopping around for the rate is worth the effort.
Frequently asked questions
How is a monthly loan payment calculated?
With the annuity formula: payment = P × r ÷ (1 − (1 + r)^−n), where r is the monthly rate and n the number of payments. 20,000 at 6% over 5 years gives 386.66 a month.
How much interest will I pay on a loan?
Multiply the monthly payment by the number of payments and subtract the amount borrowed. For 20,000 at 6% over 5 years, that is 3,199.36.
Do extra payments really save money?
Yes. Extra payments reduce the balance immediately, so less interest is charged every month after, and the loan ends sooner, as long as your lender allows them without a penalty.
Is a longer loan term better?
It lowers the monthly payment but increases the total interest. Choose the shortest term whose payment you can comfortably afford.
Why is most of my early payment interest?
Interest is charged on the outstanding balance, which is highest at the start. As the balance falls, more of each payment repays principal.
How much does a lower rate save?
On 20,000 over 5 years, going from 8% to 6% saves about 1,132 in interest and 18.87 per month.
Sources
- Consumer Financial Protection Bureau (US). What is an amortization schedule? and Know before you owe guidance.
- European Union Consumer Credit Directive 2008/48/EC (calculation of the annual percentage rate of charge).
Last reviewed 5 October 2026. Results are estimates; see our disclaimer.