If you’re considering borrowing money, knowing how to calculate loan payments and costs can help you choose the loan that best fits your short-term and long-term financial plans. Understanding the basic loan payment formula will help you calculate it for any type of loan, including personal loans, car loans, and mortgages.
Alternatively, you can use our loan calculator to do all the calculations for you, so you can focus on the payments, interest rates and terms that best suit your needs.
Bankrate Tips
Our loan calculator can help you get a rough idea of what any type of loan payment will be, without filling out an application. Try different loan terms, Annual Percentage Rates (APRs), and loan amounts to compare the difference in cost.
How the loan payment works
Your monthly loan payment is made up of several variable components: If you choose an installment loan, such as a personal loan, you will make installment payments, which means you will pay back a portion of the loan balance plus interest each month until the loan is paid in full.
You can also choose an interest-only loan, which allows you to pay only the interest each month for a set period of time. When that period is over, you pay off the balance with principal and interest payments. Regardless of the type of loan, your monthly payment will be made up of four components:
- Major: This is the total amount borrowed initially, and if it is an installment loan, it is also the amount you pay each month to reduce the remaining balance of your loan.
- interest rate: An interest rate is the amount a lender charges to lend you money, expressed as a percentage. Your interest rate is determined primarily by your credit score. The higher your score, the lower your interest rate and monthly payment will be.
- Repayment Term: This is the period over which you have to repay the loan. The longer the repayment term, the lower your monthly payments will be. However, the longer the loan term, the more interest you will pay over the life of the loan.
- Fee: Most loan types require you to pay an origination fee as part of your loan costs. The fee charged varies by lender as well as loan type. Some lenders will allow you to increase your interest rate to cover the cost, resulting in a higher monthly payment. Other lenders will require you to pay it out of pocket or have it deducted from your loan funds at loan closing.
How to use the loan repayment formula
The formula for calculating your loan payment depends on whether you choose an equal principal amortization loan or an interest-only loan. Examples of equal principal amortization loans include auto loans, home loans, and personal loans. A Home Equity Line of Credit (HELOC) is an example of a loan that typically offers an interest-only payment option.
Loan amortization
With an installment loan, part of your monthly payment is applied toward the principal balance and interest. The payment amount is calculated using a simple loan payment formula.
The principal is split into equal installments over the life of the loan. You can choose the number of years to repay the loan, but typically there are 12 payments each year. To calculate how many payments you’ll have over the life of your loan, multiply the number of years by 12.
A car loan is a type of installment loan. For example, you take out a $20,000 car loan with an annual interest rate of 6 percent and a 5-year repayment period. The interest payment on the loan is calculated as follows:
- Divide the interest by the number of payments per year, which is usually 12 payments, or one payment per month.
- Multiply that number by the original balance of the loan, starting with the full amount borrowed. For a given number, the formula for calculating your loan repayment amount is:
- 0.06 ÷ 12 = 0.005
- 0.005 x $20,000 = $100
In this example, you’ll pay $100 in interest in the first month. As you pay off your loan, more of your payment will go toward the principal balance and less will go toward interest. You can calculate your monthly principal and interest payments and see how each payment reduces your loan balance.
| Loan Beginning Balance | Monthly payment | Applied to principal | Paid as 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 |
| 11th month | $17,068 | $387 | $301 | $85 | $16,767 |
| 12th month | $16,767 | $387 | $303 | $84 | $16,464 |
How to Calculate Interest-Only Payments
With an interest-only loan, you are only obligated to pay the interest on the loan for a specified period of time. For example, many home equity lines of credit allow you to make interest-only payments for the first 10 years. This can help you manage your monthly budget if you use the funds for an ongoing project, such as a home renovation.
During the interest-only period, your principal amount stays the same, which means you only need to calculate the interest to figure your monthly payments.
For example, if you have a $20,000 line of credit with a 6 percent annual interest rate and a 10-year interest-only repayment term, multiply the amount you borrow by the interest rate, which will tell you your annual interest cost, then divide that number by 12 months to determine your monthly payment.
- $20,000 x .06 = $1,200 in interest per year
- Divide $1,200 by 12 months to get $100 in monthly interest.
Remember: Once the interest-only period on your loan ends, you’ll need to repay the loan by paying principal and interest over the remaining term of the loan.
Using a calculator to calculate your loan repayments
If you’re not good with complicated mathematical formulas, let our loan calculator do all the heavy lifting for you. Whether you’re buying a home and need a mortgage, or you need quick cash from a personal loan to pay for an emergency car repair, there’s a calculator you can use to do the math.
- A personal loan calculator can help you compare payments over a range of loan terms and interest rates, usually from one to seven years and around 8 percent to 36 percent.
- If you’re considering taking out a student loan to pay for college or trade school, you can use a student loan calculator to estimate how much you’ll pay upon graduation.
- Before you go to a dealership or even start looking for a car online, you can use a car loan calculator based on different loan amounts, repayment terms and interest rates to see what your potential car payment will be.
- A mortgage calculator can help you determine if you’re financially ready to buy a home. A mortgage calculator can help you determine how much home you can afford and how the size of your down payment will affect your monthly payments.
- You can use a home equity line of credit calculator to calculate it based on the amount you borrow from a revolving line of credit. To get an accurate figure for your specific repayment schedule, you’ll need a rough outline of the APR and annual fee (if any).
- A home equity loan is similar to a personal loan with a fixed interest rate and fixed payments, but your home is used as collateral. If you need to take out this type of loan, most home equity loan lenders offer a home equity loan calculator that will tell you what your payments will be over a 10, 15, or 30 year term.
Bankrate Tips
If you put down less than 20 percent or take out a loan insured by a government agency such as the Federal Housing Administration (FHA), you’ll find that mortgage insurance is included in your monthly payments. This insurance covers the lender’s risk if you don’t repay your loan and the lender has to foreclose and resell your home.
How to calculate your total loan cost
The total cost of a loan depends on the amount borrowed, the repayment term, and the annual percentage rate. The APR is the most important factor and represents the total amount you pay for your loan. This includes the interest rate and any fees charged by the lender.
You can use a calculator or the simple interest formula for amortizing a loan to work out exactly how much difference you’ll pay with different APRs. And because lenders can legally charge double-digit APRs, if you don’t compare rates, you could end up paying a lot of interest even if you borrow a small amount for a short period of time.
For example, a $20,000 loan with a 10 percent APR over a 48-month term would cost $4,350. Compare this to the $2,100 you’d pay at 5 percent APR, and you’ll see the importance of getting the lowest APR possible when borrowing money.
| Annual interest rate 5% | Annual interest rate 8% | Annual interest rate 10% | |
|---|---|---|---|
| Monthly payment | $460.59 | $488.26 | $507.25 |
| Total interest paid | $2,108.12 | $3,436.41 | $4,348.08 |
The length of your repayment term also plays a big role in the total cost of your loan. The longer the repayment term, the lower your monthly payments will be, but the more you’ll pay over the life of the loan.
For example, if you pay off a $20,000 loan with a 5 percent annual interest rate over 36 months instead of 60, you could save just over $1,000 in interest.
| 36 month period | 48 month period | 60 month period | |
|---|---|---|---|
| Monthly payment | $599.42 | $460.59 | $377.42 |
| Total interest paid | $1,579.05 | $2,108.12 | $2,645.48 |
Fees also come into play. If you plan to pay off your loan sooner than scheduled, find out if your lender charges prepayment penalties or fees for paying off your loan early. In some cases, it may cost less to choose a loan with a higher APR but no prepayment penalties.
The same goes for origination fees. Origination fees are usually calculated as a percentage of the loan amount, so if the fee is high, you will end up with less than the stated loan amount. Also, origination fees are usually deducted from the total loan funds you receive, but you will end up paying interest on the entire loan amount borrowed.
Still, a loan with higher fees but a lower interest rate might be cheaper. Use our calculator to compare the total cost of each loan to determine which is the better financial choice.
How to save money on loan interest payments
Interest is one of the biggest expenses you’ll incur when taking out a loan. The lower the interest rate, the less extra costs you’ll pay on top of the amount you borrow. While it’s not always possible to lower your interest rate, there are some strategies you can take that can help you save money on your loan, both at the outset and in the long run.
Get pre-qualified by multiple lenders
Getting pre-qualified for a loan allows you to see the repayment terms and interest rates you can get from a particular lender without affecting your credit. For any type of loan, get pre-qualified from at least three lenders and compare offers to choose the one that’s most favorable for you.
If you already use a local bank or credit union, inquire about discounts on interest rates and fees. Many online lenders will lower your interest rate if you arrange automatic payments through your bank.
Improve your credit score before applying
Your credit score has the biggest impact on the interest rate you pay. If you don’t need the money right away, try to reduce your credit card balances or pay them off if possible. This will increase your credit utilization ratio, improve your score, and help you significantly lower your interest rate in the future.
Make an additional payment towards the principal of your loan
If you can’t pay it off in a shorter period, make additional payments towards the principal where you can to reduce your loan balance and the total interest owed. As a bonus, you’ll pay off your loan faster.
Pay off your loan early
If you received a significant amount from a bonus or tax refund, using it to pay off your loan early could save you hundreds, or even thousands, of dollars in interest. Before taking this route, check with your lender to make sure there aren’t any prepayment penalties.
Use a 0 percent introductory APR credit card
See if you can get a card that offers 0 percent APR for a set period of time — some card offers can let you avoid paying interest for 12 to 18 months.
A 0 percent APR card can be a good alternative to a personal loan and help you pay off a big purchase without paying a lot of interest — but if you don’t pay off the card’s balance by the end of the introductory offer, you could end up paying much higher interest than with most loans.
Rent only what you need
One of the easiest 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 pay.
Before you decide how much of a loan you want to apply for, crunch the numbers carefully and make sure you only borrow what you need. Consider splitting your purchase into cash and a loan to reduce the total amount of interest you pay.
