How to calculate loan payments and costs
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Key takeaways
- Your payment is calculated based on your chosen interest rate and repayment period.
- The type of loan (interest-only or amortizing) will determine the loan payment formula and how interest is calculated.
- Using a loan calculator can help determine the exact monthly payments for a loan, making it easier to budget and avoid mistakes.
- It’s important to calculate the total cost of a loan to understand how much it costs monthly and long term.
Knowing how to calculate your loan payments and costs can help you choose the best loan for your short- and long-term financial plans if you’re considering borrowing money. Once you understand the basic loan payment calculation formula, you can run numbers on any type of financing, whether it’s a personal loan, an auto loan or a mortgage.
Alternatively, you can use a loan calculator, and all the math is done for you so you can focus on which payment, interest rate and terms are best for your needs.
How loan payments work
Several moving parts make up your monthly loan payment. You’ll have an amortizing payment if you choose an installment loan, like a personal loan. That means each month you’ll pay a portion of your loan balance off along with interest until the loan is paid in full.
You can also choose an interest-only loan, allowing you to only pay the interest charge each month for a set period. After that period ends, you pay the balance off in principal and interest payments. Four elements make up your monthly payment, regardless of type.
- Principal: This is the total amount you borrow when you first take out a loan. It’s also the amount you pay each month to reduce your loan balance with an amortizing loan.
- Interest rate: An interest rate is the amount lenders charge for lending money, expressed as a percentage. Your interest is mostly determined by your credit score. The higher it is, the lower your rate and monthly payment will be.
- Repayment term: This is the amount of time you have to repay the loan. The longer the repayment period, the less you’ll pay each month. However, you’ll have more interest over the life of a loan with a longer term.
- Fees: Most loan types require you to pay origination fees as part of the loan costs. The fees you’ll be charged not only vary by lender but also by loan type. Some lenders will allow you to increase your rate to cover the costs, resulting in a higher monthly payment. Others require you pay the costs out of pocket when you close or deduct them from your loan funds.
How to use a loan payment formula
The formula for calculating your loan payment depends on whether you choose an amortizing or interest-only loan. Examples of amortizing loans include car loans, mortgages and personal loans. Home equity and personal lines of credit are examples of loans that typically offer an interest-only payment option.
Amortizing loans
Amortizing loans apply some of your monthly payment toward your principal balance and interest. The payment is calculated using the simple loan payment formula. 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 yearly.
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
| Starting loan balance | Monthly payment | Paid toward principal | Paid toward interest | New loan balance | |
|---|---|---|---|---|---|
| Month 1 | $20,000 | $387 | $287 | $100 | $19,713 |
| Month 2 | $19,713 | $387 | $288 | $99 | $19,425 |
| Month 3 | $19,425 | $387 | $290 | $97 | $19,136 |
| Month 4 | $19,136 | $387 | $291 | $96 | $18,845 |
| Month 5 | $18,845 | $387 | $292 | $94 | $18,552 |
| Month 6 | $18,552 | $387 | $294 | $93 | $18,258 |
| Month 7 | $18,258 | $387 | $295 | $91 | $17,963 |
| Month 8 | $17,963 | $387 | $297 | $90 | $17,666 |
| Month 9 | $17,666 | $387 | $298 | $88 | $17,368 |
| Month 10 | $17,368 | $387 | $300 | $87 | $17,068 |
| Month 11 | $17,068 | $387 | $301 | $85 | $16,767 |
| Month 12 | $16,767 | $387 | $303 | $84 | $16,464 |
Interest-only loans
With interest-only loans, you’re responsible for paying only the interest on the loan for a specified length of time. For example, many home equity lines of credit loans let you make interest-only payments for the first 10 years. This can help you manage your monthly budget if you’re using the funds for an ongoing project like a home renovation.
The amount of principal you owe will stay the same during the interest-only period, which means you only need to do an interest calculation to figure out your monthly payment.
- $20,000 x 0.06 = $1,200 in interest each year
- $1,200 divided by 12 months = $100 in interest per month
Calculation of loan repayment using a calculator
If you’re not a fan of complicated math formulas, let a calculator do all the hard work. Whether you’re buying a house and need a mortgage or need quick cash from a personal loan to pay for an emergency car repair, there’s a calculator available for you to crunch numbers.
Personal loan calculator
A personal loan calculator allows you to compare the payments on a variety of loan terms to figure out which one is the best fit for your budget. This is important because personal loan interest rates range from 7 to 36 percent, depending on your credit score and how much you borrow.
Personal loan terms are also shorter than other loan types with most lenders offering repayment periods between one and seven years. A shorter term will help you pay your loan off faster, but cost you more monthly. A longer term will lower your payment, but you’ll spend more on total interest paid.
Student loan calculator
If you’re considering a student loan to pay for college or trade school, you can use a student loan calculator to estimate how much you’ll pay when you graduate. The standard repayment plan term is 10 years, but you may find terms as short as five years and as long as 25 years.
Your rate, loan amount and term will depend on whether you pursue private or federal student loans and your academic year and level of education. If you recently graduated and have a high-paying job, you can also use the calculator to see how extra payments might help you pay off your student loan early.
Mortgage calculator
A home is usually the most expensive asset you’ll buy in your lifetime, and using a mortgage calculator is a good way to decide if you’re ready to be a homeowner. When you buy a home, you’ll notice the payment includes principal, interest, taxes and insurance, which is PITI for short.
The “T” and the “I” refer to property taxes and homeowners insurance, which are generally part of your monthly payment when you get a mortgage. Lenders use the PITI calculation to determine if you qualify for the loan.
Most homeowners choose a 30-year term to get the lowest monthly payment. You can also use the calculator to see how a bigger down payment affects the payment.
Home equity line of credit calculator
A home equity line of credit calculator lets you crunch numbers based on how much you borrow from your revolving line of credit. If you’re budgeting for home improvement or need to buy some inventory for your business, you can run numbers on the calculator to see the monthly payment on the amount you borrow.
You’ll need a general idea of the APR to get accurate figures for a specific repayment timeline or estimate payments for draws you plan to make. Most HELOCs require an annual fee which you can add into the calculator to see how the fees affect your total HELOC costs.
Home equity loan calculator
A home equity loan is like a personal loan with fixed interest rates and payments, except your home secures it. If you need to take out a home equity loan, use a home equity loan calculator to see how much your payment would be on the 10-, 15- or even 30-year terms most home equity loan lenders offer.
Most lenders require you to have more than 15 percent equity in your home to qualify, so your home’s value will ultimately determine how much you can borrow. Your credit score has a major impact on the rate you’re offered. If it’s below 620, consider a bad credit personal loan instead.
Auto loan calculator
Before heading to the dealership or looking online for a car, you can view some car payments with an auto loan calculator first. You can try out different loan amounts, repayment terms and interest rates which may help you decide between a new or used car. Auto loans usually come with shorter terms than personal or home equity loans, and your credit score will play a key role in how high or low your offered rate is.
How to calculate total loan costs
The total cost of a loan depends on the amount you borrow, how long you take to pay it back and the annual percentage rate. The APR is the most important factor — it reflects the total amount you’ll pay for borrowing money including the interest rate and any fees charged by the lender. You can use a calculator or the simple interest formula for amortizing loans to get the exact difference.
For example, a $20,000 loan with a 48-month term at 10 percent APR costs $4,350. Compare that to the $2,100 you’ll spend for a 5 percent APR, and you can see the importance of getting the lowest APR possible when you borrow money. 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 | |
|---|---|---|---|
| Monthly payment | $460.59 | $488.26 | $507.25 |
| Total interest paid | $2,108.12 | $3,436.41 | $4,348.08 |
The repayment term length can also greatly impact the total cost of your loan. A longer term means you pay less monthly, but more over the life of the loan.
For example, you’ll save $1,000 in interest charges on a $20,000 loan with a 5 percent APR if you pay it off in 48 months versus 60 months.
| 36-month term | 48-month term | 60-month term | |
|---|---|---|---|
| Monthly payment | $599.42 | $460.59 | $377.42 |
| 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, see if the lender charges any prepayment penalties or fees for paying off your loan early. In some cases, it may cost less to go with a loan with a higher APR but no prepayment penalty.
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 related to 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 could help you save money on your loan initially and over time.
Get prequalified with multiple lenders
Prequalifying for a loan allows you to see the repayment terms and interest rates you qualify for with a specific lender without impacting your credit. When shopping for any kind of loan, prequalify with at least three lenders so you can compare offers side by side and choose the most favorable one.
Ask your local bank or credit union about interest rate or fee discounts if you already bank with them. Many online lenders offer lower rates if you set up an automatic payment arrangement through your bank.
Work on your credit scores before you apply
Your credit score plays the biggest role in the interest rate you pay. If you don’t need money immediately, pay down your credit card balances or — better yet — pay them off. This will boost your credit utilization ratio and improve your scores so you qualify for much lower interest rates in the future.
Make extra payments toward your loan principal
If you can’t afford a shorter term, make an extra payment toward your principal whenever you can to reduce your total loan balance and the total interest you owe. A bonus: You’ll pay your loan off faster.
Pay your loan off early
If you receive a considerable sum from a bonus or tax refund, using it to pay off your loan early could save you hundreds, if not thousands in interest charges. Check with your lender to ensure there isn’t a prepayment penalty before going this route.
Use a 0 percent introductory APR credit card
See you qualify for a card that offers a 0 percent APR for a set amount of time. Depending on the card offer, you could avoid interest altogether for 12 to 18 months. A 0 percent APR card is a good alternative to a personal loan and can help you pay off a large purchase without facing huge interest payments. That said, if you don’t pay the card’s balance off by the time the introductory offer is over, you may pay interest much higher than most loans.
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 you’ll pay.
Crunch the numbers carefully before deciding how much of a loan you want to apply for, and only borrow enough exactly what you need. Consider splitting up your purchase between cash and a loan to reduce the total interest you pay.
Frequently asked questions
-
Always look at your current budget before you borrow money.
Can you handle a new payment based on how much money you spend on your lifestyle?If you don’t know your credit score, check it before applying.Once you are ready to borrow, always shop around lenders and compare their rates and fees and choose the lender with terms that fit your financial goals. -
Your payment history affects your credit scores most, so even a 30-day late payment will tank your scores quickly.
You may rack up late payment fees, have debt collectors calling you nonstop or even be sued in court if you default on the loan. -
A prepayment penalty is a fee a lender charges if you pay off some or all of a loan before a set period.
They are more common in bad credit lending scenarios. They are also a common feature of HELOCs and may be called early closure or termination fees.
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