How to Calculate a Loan Payment (and How Much Extra Payments Save)

Banks quote loans as a rate and a term, but what you actually live with is the monthly payment and the total interest. Both come from one formula, and once you see how it works you can test any offer before signing.

The fixed-payment formula

Most car loans, personal loans and mortgages use a fixed payment (also called an amortizing loan). The payment is:

payment = P × i ÷ (1 − (1 + i)−n)

where P is the amount borrowed, i the monthly rate (the annual rate ÷ 12) and n the number of months. Each month, interest is charged on the balance that's left; whatever remains of the payment reduces the balance.

A worked example

Take a $25,000 loan at 7% a year over 60 months. In the loan calculator:

• Monthly payment: $495.03
• Total interest over five years: about $4,702

In the first month, $145.83 of the payment is interest (0.583% of $25,000) and the rest goes to principal. By the last year almost the whole payment is principal. That's why the amortization schedule matters: early in a loan, most of your money pays the bank.

What $100 extra a month does

Add $100 extra each month to the same loan and it's paid off in 49 months instead of 60, with about $3,763 in interest — roughly $940 saved. Every extra dollar goes straight to principal, and principal you've already repaid never accrues interest again. On a 30-year mortgage the effect is far larger.

Before prepaying, check two things: that the lender has no prepayment penalty, and that the extra goes to principal (some lenders apply it to the next payment unless you ask).

Fixed payment vs constant principal

Some loans repay the same principal every month instead. Payments start higher and fall over time. On the example above the first payment would be $562.50 and the last $419.10, with about $4,448 in interest — less, because the balance shrinks faster. The calculator lets you switch between both methods.

Checklist before you accept a loan

• Compare offers by total cost, not by monthly payment: a longer term lowers the payment but raises the interest.
• Ask whether the rate is annual nominal (APR) or effective, and whether fees are included.
• Run a version with a realistic extra payment. If you can afford it, a shorter term usually makes more sense.

Saving instead of borrowing? The compound interest calculator shows the same math working in your favor. Juggling several balances? The debt payoff calculator tells you which to attack first.