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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. Determining the exact amount of the installment payments in advance of establishing a new loan, however, can be difficult.

You’re not just repaying the principal when you borrow money from a lender. The monthly installment payments will also include interest, which is the cost of borrowing the money. Here are some of the ways to calculate what your monthly installment payments might look like.

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. In your loan, you can break down the costs by:

  • 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 paid upfront costs, like origination fees. For most personal loans, you have a fixed interest rate, which means your monthly payments won’t change over the life of the loan. Interest rates are determined by 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 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.

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, along with interest charges 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 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.

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:

  • $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

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, usually 12 months.
  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 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.

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 your 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.

Mortgage calculator

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, interest rate (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. This calculator will ask for your desired loan amount, repayment term and interest rate, and whether the car you want is new or used. 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 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, some strategies 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 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 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. 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 amount of 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 to cover whatever costs you’re hoping to pay with the loan.

The bottom line

When taking out a loan, be sure you have a general idea of your monthly repayment responsibilities. The payments will include not only the principal amount borrowed but also interest. There may also be fees associated with the loan.

Before finalizing your loan application, use an online loan payment calculator to help you understand what the payments may look like. And remember, many strategies can help you save money on payments over time, including not borrowing more than you need and paying off your loan early.

Learn more:

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
Loans Editor, Former Insurance Editor
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