How loan payments are calculated
Personal loans, auto loans, student loans and mortgages are usually amortized: you pay the same amount every month, and each payment covers that month’s interest first and the rest reduces the balance. Early payments are mostly interest; later ones are mostly principal.
M is the monthly payment, P the amount borrowed, r the monthly rate (APR ÷ 12) and n the number of monthly payments.
Example
Borrowing $15,000 at 10.5% APR for 5 years gives r = 0.00875 and n = 60, so the payment is $322.41 a month. Over 60 payments you repay $19,344.51, of which $4,344.51 is interest.
How the term changes total cost
A longer term lowers the monthly payment but raises the total interest. For $15,000 at 10.5%:
Ways to pay less interest
- Improve your credit score before applying; rates for excellent credit can be half those for fair credit.
- Choose the shortest term whose payment fits your budget.
- Make extra principal payments (use the Extra payments option above) and confirm there is no prepayment penalty.
- Compare offers by APR, which includes origination fees, rather than by interest rate alone.
Related Installment Borrowing & Debt Tools
Understanding installment loan amortization empowers borrowers to minimize cumulative interest. Model vehicle financing options with our Auto Loan Calculator, uncover true origination and borrowing fees using the APR Calculator, calculate 30-year home financing with the Mortgage Calculator, and plan accelerated payoffs via our Debt Payoff Calculator.
Frequently asked questions
What is the difference between interest rate and APR?
The interest rate is the cost of borrowing the principal. APR adds required fees such as origination charges, so it reflects the true yearly cost and is the better number for comparing lenders.
Does paying extra each month really help?
Yes. Extra money goes straight to principal, so every following month accrues less interest. On a 5-year, $15,000 loan at 10.5%, an extra $50 a month saves about $770 in interest and ends the loan 10 months early.
Is this calculator suitable for interest-only or balloon loans?
No. It assumes a fully amortizing fixed-rate loan with equal monthly payments. Interest-only, balloon and variable-rate loans have different payment schedules.