Calculate Loan Payments and Costs: Formulas and Tools

Free calculators show how debt works

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A loan payment calculator provides the answers you need when deciding whether or not you can afford to borrow money. Use one to learn how much you need to pay each month and if it is affordable given your income and other monthly expenses.

Different Loans, Different Calculations

Methods of calculation vary based on the type of loan. For example, with interest-only loans, you don’t pay down any of the principal in the early years—only interest. Amortizing loans, on the other hand, involve paying toward both principal and interest over a set period of time, such as with a five-year auto loan.

If you don't want to do calculations by hand, create your own calculator in a spreadsheet program like Microsoft Excel or Google Sheets, or download an existing calculator and adapt it to your own needs. Either option allows you to complete calculations and see how a loan's balance and interest payments change every month over the life of the loan.

Determine which type of calculator to use based on the type of loan or specific calculation:

Amortized Loan Payment Formula

Calculate your monthly payment (p) using your principal balance or total loan amount (a), periodic interest rate (r), which is your annual rate divided by the number of payment periods, and your total number of payment periods (n):

  • Formula: a/{[(1+r)^n]-1}/[r(1+r)^n]=p

Assume you borrow $100,000 at 6% for 30 years to be repaid monthly. To calculate the monthly payment, convert percentages to decimal format, then follow the formula:

  • a: 100,000, the amount of the loan
  • r: 0.005 (6% annual rate—expressed as 0.06—divided by 12 monthly payments per year)
  • n: 360 (12 monthly payments per year times 30 years)
  • Calculation: 100,000/{[(1+0.005)^360]-1}/[0.005(1+0.005)^360]=599.55, or 100,000/166.7916=599.55

The monthly payment is $599.55. Check your math with an online payment calculator.

Interest-Only Loan Payment Formula

Calculating payments for an interest-only loan is easier. Multiply the amount you borrow (a) by the annual interest rate (r), then divide by the number of payments per year (n). Or, multiply the amount you borrow (a) by the monthly interest rate, which is the annual interest rate (r) divided by 12:

  • Formulas: a*(r/n) or (a*r)/12

Using the previous loan example of $100,000 at 6%, your calculation would look like this:

  • a: 100,000, the amount of the loan
  • r: 0.06 (6% expressed as 0.06)
  • n: 12 (based on monthly payments)
  • Calculation 1: 100,000*(0.06/12)=500, or 100,000*0.005=500
  • Calculation 2: (100,000*0.06)/12=500, or 6,000/12=500

Either way, you get $500. Check your math with an interest-only calculator.

Credit Card Payment Calculations

Credit cards also use fairly simple math, but determining your balance takes more effort because it constantly fluctuates. Lenders typically use a formula to calculate your minimum monthly payment that is based on your total balance. For example, your card issuer might require that you pay at least $25 or 1% of your outstanding balance each month, whichever is greater.

It’s wise to pay more than the minimum due each month, but the minimum is the amount you must pay to avoid late charges and other penalties.

For example, if you owe $7,000 on your credit card and your minimum payment is calculated as 1% of your balance, you would multiply $7,000 by 0.01 to get a minimum monthly payment of $70. This would not include any late fees or other penalties owed. Check your math with a credit card payment calculator.

Because your credit card charges interest each month, your balance changes every month, affecting what your minimum monthly payment will be. Many times, the minimum monthly payment on a high balance will not be enough to cover the accrued interest.

For example, if the card in the previous example has a 19.99% annual percentage rate (APR), you would calculate your monthly interest charges by multiplying your balance by the APR/12 or 0.1999/12, which is 0.0166. If you multiply 0.0166 by the $7,000 balance, you get $116.20, which would be the amount of interest you accrued for that month. As you can see, the interest charges exceed the minimum monthly payment, so the balance would continue to grow even if making the minimum payment each month.

Total Loan Cost

It can be difficult to understand exactly how much you'll pay when you have several competing loan offers. One might have a lower interest rate, while another offers lower fees. Figuring out which offer to choose means you'll need to calculate the total cost of the loan including interest and fees. Calculators help with apples-to-apples comparisons. For example, some amortization calculators show you lifetime interest which you can use to compare interest costs from loan to loan. 

Consider more than just your monthly payment amount when reviewing the terms of a loan. 

In addition to your monthly payment, it’s crucial to focus on the purchase price, lifetime interest, and any fees.

APR is another useful tool for comparing loan costs. On mortgages, some APRs account for up-front costs (such as closing costs) in addition to the interest rate you pay on your loan balance. But the lowest APR isn’t always the best loan. You might not even qualify for the lowest advertised APR. If the APR is low but closing costs and fees are high, and you don't keep your loan for very long, you won't see the benefits of that low APR.

Getting the Best Deals

Your monthly loan payment is just a result of the loan amount, the interest rate, and the length of your loan. Salespeople and lenders can make a low monthly payment seem like you’re getting a good deal—even when you’re not.

For example, some auto dealers want you to focus solely on your monthly payment, which is why they often ask how much you can afford each month. With that information, they can sell you almost anything and fit it into your monthly budget by extending the life of the loan.

It is better to negotiate a lower purchase price than a lower monthly payment. Lowering the sales price decreases one of the three components of the total loan cost.

Stretching out your loan means you’ll pay more in interest over the life of the loan, increasing the total cost of the loan. Plus, longer-term loans might be riskier: when they're used by buyers with lower credit to finance larger amounts, there's a greater risk of default.

A Shortcut to Paying Less Interest

To further minimize your loan costs, try to pay off your debt early. As long as there's no prepayment penalty, you can save on interest by paying extra each month or by making a large lump-sum payment.

Depending on your loan, your required monthly payments going forward might or might not change—ask your lender before you pay.

Article Sources

  1. Consumer Financial Protection Bureau. "What Is an 'Interest-Only' Loan?" Accessed March 2, 2020.

  2. Consumer Financial Protection Bureau. "What Is Amortization and How Could It Affect My Auto Loan?" Accessed March 2, 2020.

  3. California State Board of Equalization. "Lesson 7: Periodic Repayment (Assessors’ Handbook 505, Column 6)." Accessed March 2, 2020.

  4. MIT OpenCourseWare. "Chapter 17: Mortage Basics II: Payments, Yields, and Values." Accessed March 2, 2020.

  5. Bank of America. "Example of Credit Card Agreement for Bank of America Visa Signature Accounts," Page 8. Accessed March 2, 2020.

  6. Board of Governors of the Federal Reserve. "Regulation Z Truth in Lending: Introduction," Page 12-19. Accessed March 2, 2020.

  7. Consumer Financial Protection Bureau. "Learn About Loan Costs." Accessed March 2, 2020.

  8. Consumer Financial Protection Bureau. "How Do I Compare Auto Loan Offers? What Should I Look at Besides the Monthly Payment?" Accessed March 2, 2020.

  9. Consumer Financial Protection Bureau. "CFPB Report Finds Sharp Increase In Riskier Longer-Term Auto Loans." Accessed March 2, 2020.

  10. Consumer Financial Protection Bureau. "Can I Prepay My Loan at Any Time Without Penalty?" Accessed March 2, 2020.