Loan Calculator

How Loan Payments Are Calculated

Most installment loans — mortgages, auto loans, personal loans, and student loans — use a formula called amortization. Each month, you pay a fixed amount that covers both the interest accrued and a portion of the principal. Early in the loan, most of your payment goes to interest; by the end, most goes to principal.

The monthly payment formula is:

M = P × [r(1+r)n] / [(1+r)n − 1]

• M = monthly payment
• P = principal (the amount borrowed)
• r = monthly interest rate (annual rate ÷ 12 ÷ 100)
• n = total number of monthly payments

What Affects Your Monthly Payment?

Three variables determine your payment, and understanding them helps you save money:

• Loan amount (principal). The more you borrow, the higher your payment — but the relationship is linear. Borrow twice as much and you pay roughly twice as much per month.
• Interest rate. This has a powerful effect, especially on long loans. On a 30-year mortgage, even a 1% rate difference can mean tens of thousands of dollars over the life of the loan.
• Loan term. A longer term lowers your monthly payment but dramatically increases total interest paid. A 15-year mortgage costs more per month than a 30-year, but often saves six figures in interest.

The Trade-off: Monthly Payment vs. Total Cost

Here's the key insight most borrowers miss: extending the term makes the loan feel cheaper but costs far more in total. Consider a $20,000 loan at 7.5%:

• 3-year term: ~$622/month, ~$2,400 in total interest
• 5-year term: ~$400/month, ~$4,000 in total interest
• 7-year term: ~$306/month, ~$5,700 in total interest

Going from 3 to 7 years cuts your monthly payment by half — but more than doubles your interest cost. Always look at total interest, not just the monthly number.

Common Loan Types

• Mortgages. 15-30 year loans for buying a home, typically the largest debt most people take on. Secured by the property itself.
• Auto loans. 3-7 year loans for vehicles. Secured by the car, so rates are lower than unsecured loans.
• Personal loans.1-7 year unsecured loans for any purpose. Rates are higher because there's no collateral.
• Student loans. 10-25 year terms, often with deferred payments while in school. Rates vary widely between federal and private loans.

How to Lower Your Interest Costs

1. Choose a shorter term.If you can afford the higher payment, you'll save dramatically on interest.
2. Make extra payments. Even one extra payment a year, applied directly to principal, can knock years off a mortgage. Confirm your lender allows this without prepayment penalties.
3. Improve your credit score. Better credit unlocks lower interest rates, which compounds into big savings over a long loan.
4. Refinance when rates drop.If market rates fall below what you're paying, refinancing into a lower-rate loan can save you thousands — just weigh the closing costs.

Frequently Asked Questions

Does this calculator include taxes and insurance?

No. It calculates principal and interest only. For a real mortgage payment, you'll also pay property taxes, homeowners insurance, and possibly PMI or HOA fees — these can add hundreds of dollars to your monthly payment.

What is amortization?

Amortization is the process of paying off a loan in equal installments. Each payment is split between interest (the cost of borrowing) and principal (reducing what you owe). The schedule above shows exactly how this split evolves over time.

What's a good interest rate?

It depends on the loan type and your credit. As of recent years, mortgage rates have ranged from 3% to 7%+, auto loans from 4% to 10%, and personal loans from 6% to 36%. The better your credit score, the lower the rate you'll qualify for.