How to Calculate Loan Payments and Interest
Our loan calculator helps you understand monthly payments, total interest, and the true cost of borrowing. Use it for mortgages, auto loans, personal loans, or any fixed-rate loan to make informed financial decisions.
Understanding Loan Payments
Loan payments typically consist of principal (the amount borrowed) and interest (the cost of borrowing). Most loans use amortization, where early payments are mostly interest, and later payments are mostly principal. The payment amount stays constant but the split changes over time.
Monthly Payment Formula
For fixed-rate loans: M = P × [r(1+r)^n] / [(1+r)^n - 1], where M = monthly payment, P = principal, r = monthly interest rate, n = number of payments.
Example:
A $200,000 mortgage at 6% for 30 years: Monthly rate = 0.5%, payments = 360. Monthly payment ≈ $1,199. Total paid = $431,676, of which $231,676 is interest.
Common Use Cases
Real-world applications for this calculator
Mortgage Planning
Compare different home loan scenarios-varying down payments, interest rates, and term lengths.
Auto Loans
Calculate car payments and understand the impact of different loan terms on total cost.
Debt Payoff Strategy
See how extra payments can reduce total interest and shorten loan terms.
Tips
- A lower interest rate saves more than a longer term on monthly payments.
- Bi-weekly payments (26 half-payments/year) equal 13 monthly payments, paying off your loan faster.
- The 28/36 rule: housing costs should be ≤28% of gross income, total debt ≤36%.
- Compare APRs, not just interest rates, when shopping for loans.
Frequently Asked Questions
How is loan interest calculated?
For most loans, interest is calculated on the remaining balance. Each month, you pay interest on what you still owe, plus some principal. As your balance decreases, more of your payment goes to principal.
What is APR vs interest rate?
The interest rate is the cost of borrowing the principal. APR (Annual Percentage Rate) includes the interest rate plus other fees, giving a more complete picture of the loan's true cost.
How does loan term affect my payment?
Longer terms mean lower monthly payments but more total interest. A 30-year mortgage has lower payments than a 15-year, but you'll pay significantly more interest over the life of the loan.
What is amortization?
Amortization is the process of paying off a loan through regular payments. An amortization schedule shows how each payment is split between principal and interest over the loan term.
How much can extra payments save me?
Extra payments go directly to principal, reducing total interest. Even one extra payment per year on a 30-year mortgage can save thousands in interest and pay off the loan years early.