How to calculate loan payments and costs
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Before taking on a personal loan, it’s important to know how much the monthly payments will be and whether your budget can reasonably accommodate the added expense. However, determining the exact installment payments in advance of establishing a new loan can be difficult.
Along with the principal, the original loan amount, you’ll also be paying interest, the cost of borrowing, each month. How much you pay depends on the loan type and the repayment term you’re offered. Once you have all of this information, you can use a loan calculator or simple equations to determine your monthly payment.
Take advantage of a personal loan calculator to forgo any manual math involved with finding your loan payment and cost.
How personal loan payments work
Before you can calculate your payments, you need to know the ins-and-outs of how the 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. When it comes to determining how much you can afford, look specifically at the loan’s principal amount, the annual percentage rate (APR) and the fees.
- Principal: The amount you borrow that gets deposited into your account.
- APR: What the lender charges you to lend you money. Your annual percentage rate (APR) is slightly different from your interest rate. It includes your interest rate and paid upfront costs, like origination fees.
- Fees: Additional costs of taking out a loan, such as origination fees, late fees, insufficient funds fees and more.
For most personal loans, your monthly payments won’t change over the life of the loan. Interest rates, and by extension APRs, are determined by your credit score and history — the higher your credit score, the lower your interest rate.
Your monthly payment is based on the debt and repayment term. A $5,000 loan paid over five years will have lower monthly payments than a $5,000 loan paid over three years because the payments are spread out over a longer period. However, keep in mind that your interest rate and any associated fees are also added to each loan payment.
How to use a loan payment formula
The simple loan payment formula includes your loan principal amount, your interest rate and your loan term. Your principal amount is spread equally over your loan repayment term and interest charges due over the term. Although the number of years in your term might differ, you’ll typically have 12 payments every year.
The type of loan you have determines 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.
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. Because of this, the monthly costs can be pretty easy to calculate.
For example, if you have a $20,000 loan with a 6 percent APR and a repayment term of 10 years, you would take the amount you borrowed and multiply it by your interest rate. This number would represent your annual interest costs, which you would divide by 12 months.
- $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 requiring you to make monthly payments on principal and interest after the interest-only period ends.
Amortizing loans apply some of your payment toward your principal balance and 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.
- Divide the interest rate you’re being charged by the number of payments you’ll make each year, usually 12 months.
- 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 divided by 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 toward interest. You can figure out each month’s interest payment by doing the same math shown above using your new, lower loan balance.
|Starting loan balance||Monthly payment||Paid toward principal||Paid toward interest||New loan balance|
How to calculate monthly loan payments using calculators
Different loans have different requirements and repayment terms. For example, student loans won’t have the same calculations that auto or personal loans have. Luckily, if you don’t prefer to crunch the numbers manually, there’s a calculator for nearly every loan type.
Personal loan calculator
A personal loan calculator takes your principal balance, interest rate and repayment term length and gives you a monthly payment amount 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 enter 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.
A mortgage calculator uses your principal loan amount, your monthly interest rate and the number of monthly payments you’ll make over the loan’s lifetime to determine what the monthly installment payments will be.
Using this type of calculator or crunching the numbers yourself using this formula can help determine how much house you can comfortably afford. Working through these calculations can also help determine whether you need a bigger down payment for your home purchase to help reduce the monthly payment amount.
Home equity line of credit calculator
The exact monthly payment amount for a HELOC will vary based on how much you borrow from your revolving line of credit. But some calculators can tell you how much of a monthly payment you need to make to pay off the debt on a specific timeline.
Using the calculator requires knowing your HELOC’s current balance, APR, the amount the interest rate changes per year (if at all) and any additional charges or annual fees. Using the information, HELOC payoff calculators can provide a specific repayment timeline to and the amount you would need to pay each month to meet that timeline.
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.
Enter 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. The calculator will ask for your desired loan amount, repayment term and interest rate and whether you want a new or used car. Auto loans may have shorter terms than personal or home equity loans, so you can compare how different terms affect your monthly payment.
How to calculate total loan costs
Because the total cost of a loan depends on the amount you borrow, how long you take to pay it back and the APR, even similarly sized loans may have drastically different total costs.
Your APR is the most important factor in calculating total loan cost. It is the amount you pay toward your lender, so a higher APR means a higher cost. You can use a calculator or the formula for amortizing loans to get the exact difference.
For example, a $20,000 loan with a 48-month term will cost you more than twice as much with a 10 percent APR than a 5 percent APR — the difference between paying $4,350 and $2,100. And since lenders can legally charge up to 36 percent APR, you may be stuck paying a significant amount in interest even if you borrow a small amount for a short time.
|5% APR||8% APR||10% APR|
|Total interest paid||$2,108.12||$3,436.41||$4,348.08|
The loan term is the second factor you should consider. A longer loan term means less is paid each month, but more is paid in interest overall. You can manipulate your monthly payment by extending your loan term, but to pay less, you should pick the highest monthly payment you can reasonably afford to pay off your loan as quickly as possible.
For example, a $20,000 loan with a 5 percent APR will cost you $1,000 less if you choose to pay it off over 36 months instead of 60 months.
|36-month term||48-month term||60-month term|
|Total interest paid||$1,579.05||$2,108.12||$2,645.48|
Fees will also play a role. If you plan to pay your loan ahead of schedule, compare the amount you will save on interest against the prepayment fee. In some cases, it may cost less to go with a loan that has a higher APR but no early payment fee.
The same goes for an origination fee. Since it is typically a percentage of the loan amount, you’ll get less of the actual loan with a higher origination fee. And while it is usually deducted from the total loan funds you receive, you will still pay interest on the full loan amount you borrow.
Even still, a loan with a higher origination fee but a lower interest rate may be less expensive. Compare the total cost of each loan using a calculator to determine which is the better financial choice.
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 some strategies that could help you save money on your loan over time.
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 with 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 upfront on amortizing loans.
Pay your loan off early
If you can afford higher monthly payments or pay your remaining loan balance back in a lump sum, you’ll pay less in interest over the life of the loan. Make sure there isn’t a prepayment penalty before you go this route.
Use a 0 percent introductory APR credit card
This 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.
Borrow only what you need
One of the most straightforward ways to limit the overall interest you pay is to reduce the total amount of money you borrow. The less you borrow, the less interest will be applied to the loan. Crunch the numbers carefully before deciding how much of a loan you want to apply for, and only borrow enough exactly what you need.