How to Calculate Loan Payments: Formula and Examples
Whether you're financing a car, consolidating debt, or taking out a personal loan, the same question applies: how much will I pay each month? Knowing how to calculate loan payments helps you compare offers, budget accurately, and avoid overextending yourself.
The Loan Payment Formula
Most installment loans use the same standard formula:
M = P × [r(1+r)^n] / [(1+r)^n – 1]
Where:
- M = Monthly payment
- P = Principal (loan amount)
- r = Monthly interest rate (annual rate ÷ 12)
- n = Total number of payments (years × 12)
Auto Loan Example
Let's say you're financing a $30,000 car at 5.9% APR for 60 months:
- P = $30,000
- r = 0.059 ÷ 12 = 0.00492
- n = 60
- Monthly payment ≈ $579
Over the 5-year term, you'll pay approximately $34,740 total — $4,740 of that is interest.
Understanding Amortization
Loan payments are amortized, meaning each payment splits between principal and interest. Early in the loan, most of your payment goes toward interest. As the balance decreases, more of your payment goes toward principal. This is why paying off a loan early can save so much on interest.
How Extra Payments Save Money
Adding just $50 per month to that $30,000 auto loan at 5.9% APR would save you roughly $650 in interest over the life of the loan and shave off nearly 10 months of payments. The higher your interest rate, the more impact extra payments have.
Use Our Loan Calculator
Our loan calculator makes it easy to see your full amortization schedule, compare different loan terms, and understand how extra payments affect your total cost. For larger loans like mortgages, check our mortgage calculator for a more detailed breakdown.
Conclusion
Understanding how loan payments are calculated helps you borrow smarter. Always compare APRs and loan terms before committing, and consider making extra payments when possible to reduce total interest.