How to calculate loan payments and costs

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When taking out a personal loan, the big question is: How much will it cost each month to pay the loan back? You’re repaying more than just the money you borrowed from the lender, of course; your monthly loan payment also includes interest (or the cost of borrowing the money). The size of each payment also depends on how long you have to repay the loan.

Loan calculators, which do the math for you, are available for many borrowing scenarios, from student loans to personal loans and home equity loans. However, if you’d prefer to use the loan payment formula yourself, here’s how to calculate your monthly payment on all types of loans.

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How personal loan payments work

In addition to your loan’s principal amount, you’re on the hook for interest and any fees associated with a personal loan. Here’s what you can expect to repay when you take out a personal loan:

  • Principal: The amount you borrow that gets deposited into your account.
  • Interest: What the lender charges you to lend you money. Your annual percentage rate (APR) includes your interest rate and costs that are paid up front, such as origination fees. For most personal loans, you have a fixed interest rate, which doesn’t change over the life of the loan. Interest rates are determined by market forces, as well as your credit score and history — the higher your credit score, the lower your interest rate.
  • Fees: Additional costs of taking out a loan, such as origination fees, late fees, insufficient funds fees and more.

Your monthly payment is based on how much you owe and your repayment term. A $5,000 loan paid over five years will have lower monthly payments than a $5,000 loan paid over three years, since the payments are spread out over a longer period. However, keep in mind that your interest rate and any associated fees are also added into each loan payment.

Loan payment formula

The simple loan payment formula involves the following variables: your loan principal amount, your interest rate and your loan term. Your principal amount is spread equally over your loan repayment term, along with interest charges and fees that are due over the term. Although the number of years in your term might differ, you’ll typically have 12 payments to make every year.

The type of loan you select will determine the type of loan calculator you need to use to figure out your payments. There are interest-only loans and amortizing loans, which include principal and interest.

Interest-only loans

With interest-only loans, you’re responsible for paying only the interest on the loan for a specified length of time. The amount of principal you owe will stay the same during that period. Monthly loan costs are pretty easy to calculate.

Let’s calculate your costs if you have a $20,000 loan with a 6 percent APR and a repayment term of 10 years. In this case, you would take the amount you borrowed and multiply it by your interest rate. This figure would represent your annual interest costs, which you would divide by 12 months.

Example interest-only loan payment formula:

$20,000 x 0.06 = $1,200 in interest each year

$1,200 divided by 12 months = $100 in interest per month

Of course, interest-only loans don’t last forever. Once the interest-only period of your loan ends, you’ll be required to repay the principal amount you borrowed. Typically, interest-only loans turn into amortizing loans that require you to make regular monthly payments on principal and interest after the interest-only period ends.

Amortizing loans

Amortizing loans apply some of your payment toward your principal balance as well as interest each month.

Car loans are a type of amortizing loan. Let’s say you took out an auto loan for $20,000 with an APR of 6 percent and a five-year repayment timeline. Here’s how you would calculate loan interest payments.

  1. Divide the interest rate you’re being charged by the number of payments you’ll make each year, which should be 12.
  2. Multiply that figure by the initial balance of your loan, which should start at the full amount you borrowed.

For the figures above, the loan payment formula would look like:

0.06 ÷ 12 = 0.005

0.005 x $20,000 = $100

That $100 is how much you’ll pay in interest in the first month. However, as you continue to pay your loan off, more of your payment goes toward the principal balance and less goes toward interest. You can figure out each month’s interest payment by doing the same math shown above using your new, lower loan balance.

Paying off an amortizing loan

Starting loan balance Monthly payment Paid toward principal Paid toward interest New loan balance
Month 1 $20,000 $386.66 $286.66 $100.00 $19,713.34
Month 2 $19,713.34 $386.66 $288.09 $98.57 $19,425.25
Month 3 $19,425.25 $386.66 $289.53 $97.13 $19,135.72
Month 4 $19,135.72 $386.66 $290.98 $95.68 $18,844.75
Month 5 $18,844.75 $386.66 $292.43 $94.22 $18,552.32
Month 6 $18,552.32 $386.66 $293.89 $92.76 $18,258.42
Month 7 $18,258.42 $386.66 $295.36 $91.29 $17,963.06
Month 8 $17,963.06 $386.66 $296.84 $89.82 $17,666.22
Month 9 $17,666.22 $386.66 $298.32 $88.33 $17,367.89
Month 10 $17,367.89 $386.66 $299.82 $86.84 $17,068.07
Month 11 $17,068.07 $386.66 $301.32 $85.34 $16,766.76
Month 12 $16,766.76 $386.66 $302.82 $83.83 $16,463.94

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

How to calculate monthly loan payments using calculators

Different loans have different requirements. Student loans won’t have the same calculations that auto or personal loans have. Here’s how to use loan calculators based on the type of loan you have.

Personal loan calculator

A personal loan calculator takes your principal balance, interest rate and repayment term length and gives you a total monthly payment amount that is due every month.

Most simple personal loans will work with this calculator, but you can also use a more detailed loan payment calculator if you have specific calculations, such as how making additional principal payments will impact the length of your loan and the amount of interest you pay.

Student loan calculator

If you’re trying to figure out some details about student loan repayment, you can use a student loan calculator.

When you put in your loan amount and interest rate and try entering different loan terms, this calculator can help you determine how much you’ll need to pay each month to pay your student loan off early. You can also see how a one-time extra payment or extra monthly or yearly payments would impact your total loan repayment.

Home equity loan calculator

If you need to take out a home equity loan, you’ll first need to see how much you can borrow with a home equity loan calculator.

You’ll need to plug in your address, the estimated value of your home, your estimated mortgage balance and your credit score. Even though your available home equity is a major part of how much you can borrow through a home equity loan, your credit score will also factor into the loan amount and your interest rate.

Auto loan calculator

Before you settle on taking out a car loan at the dealership, you can do your homework with an auto loan calculator first. This calculator will ask for your desired loan amount, repayment term and interest rate, as well as whether the car you want is new or used. Auto loans may have shorter terms than personal loans or home equity loans, so you can compare how different terms could affect your monthly payment.

How to save money on loan interest payments

Interest is one of the biggest expenses of taking out a loan. The lower your interest rate, the less extra money you’ll pay on top of what you borrowed. While it’s not always possible to lower your interest rate, there are strategies that might help you save money on your loan over time.

  • Get prequalified. If you can see what size loan you qualify for without completing a full loan application — and risk getting denied — you’ll be able to compare rates from many lenders. Once you shop around, you can choose the lender that offers you the lowest interest rate, fewest fees and best repayment terms.
  • Make extra payments toward your loan principal. Every month you’ll have one loan payment. Some of that will go toward your principal and some will go toward interest. Whenever you can, make an extra payment toward your principal. Doing so will reduce your total loan balance and the overall interest you owe. The sooner you do this, the better, since interest is charged up front on amortizing loans.
  • Pay your loan off early. If you can afford higher monthly payments or if you can pay your remaining loan balance back in a lump sum, you’ll pay less in interest over the life of the loan. Just make sure that there isn’t a prepayment penalty before you go this route.
  • Use a 0 percent introductory APR credit card. This type of card gives you 0 percent APR for a set amount of time, anywhere from 12 to 18 months, depending on your card’s offer. This can help you pay off a large purchase without facing huge interest payments. But if you don’t pay the card’s balance off by the time the introductory offer is over, interest payments will kick in, often at a much higher rate.

The bottom line

Now that you know how to calculate the monthly payment on your loan, make sure you don’t miss a payment. One way to ensure your loan payments are made on time is to enroll in auto-pay through your lender or your bank. You can determine which date payments are withdrawn from your bank account; just make sure it’s by your loan payment’s due date.

If you anticipate that you won’t make a payment for any reason, reach out to your lender to learn more about your options. Your lender might offer a temporary deferment or a revised installment plan if you’re facing financial hardship, though all lenders are different. Keeping in good standing with your loans will help your credit, get you out of debt faster and help you avoid default.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Associate loans editor