How Loan Payments Are Calculated (With Examples)
Learn the loan payment formula, how each payment splits between interest and principal, and how the term changes your total cost, with a free loan calculator.
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Free tool: Loan CalculatorCar loans, personal loans and student loans usually work the same way: you borrow a fixed amount and repay it in equal monthly payments that cover interest and pay down the balance until it reaches zero. Knowing how that payment is worked out helps you compare offers and choose a term. This guide explains the formula, the split between interest and principal and the trade-offs of different terms, with the free Loan Calculator.
The loan payment formula
Monthly payment = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)
where P is the amount borrowed, r the monthly interest rate (annual rate ÷ 12) and n the number of monthly payments.
Example: you borrow $25,000 at 7.5% for 5 years (60 payments):
- Monthly payment: $500.95
- Total paid: $30,056.92
- Total interest: $5,056.92
Where each payment goes
Each month, interest is charged on the balance still owed, and the rest of the payment reduces the balance. In the first month, interest is $25,000 × 0.075 ÷ 12 = $156.25, so $344.70 goes toward the loan. As the balance falls, the interest share shrinks and more of each payment pays down the loan. The calculator's yearly table shows the cumulative principal and interest and the remaining balance at the end of each year.
How the term changes the cost
On the same $25,000 at 7.5%:
| Term | Monthly payment | Total interest |
|---|---|---|
| 3 years | $777.66 | $2,995.60 |
| 5 years | $500.95 | $5,056.92 |
| 7 years | $383.46 | $7,210.38 |
A longer term lowers the payment but costs more interest: stretching from 3 to 7 years cuts the payment in half but more than doubles the interest. Lenders also often charge higher rates on longer loans, which widens the gap further.
The rate quoted vs the effective rate
A 7.5% rate charged monthly is slightly more than 7.5% a year once compounding is counted: about 7.76%. The calculator shows this effective annual rate. When comparing loans with fees, use the APR, which includes them; the APR Calculator works it out.
How to use the Loan Calculator
- Open the Loan Calculator.
- Enter the loan amount, the annual interest rate and the term in years.
- Read the results: the monthly payment, the total payment, the total interest and the effective rate.
- Check the yearly breakdown of payments, cumulative principal, cumulative interest and remaining balance, and the charts of how the loan is paid down.
Tips for borrowing less expensively
- Choose the shortest term you can comfortably afford.
- Compare several lenders; even half a point matters over a few years. The Loan Comparison Calculator puts offers side by side.
- Watch for fees and prepayment penalties.
- Pay a little extra when you can. Extra payments go straight to principal and shorten the loan.
Frequently asked questions
How do I calculate a monthly loan payment?
Use the formula P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1). A $25,000 loan at 7.5% for 5 years works out to $500.95 a month.
Is a longer loan term worse?
It lowers the monthly payment but increases the total interest. Choose the shortest term whose payment fits your budget with room to spare.
Why does more of my payment go to interest at first?
Because interest is charged on the balance you still owe, which is highest at the start. As you pay the balance down, each payment's interest portion shrinks.