Calculate Loan Payments and Costs: Formulas and Tools

These Free Calculators Show You How Debt Works

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When borrowing money, the required monthly payments are typically a big concern. Is the loan affordable, given your income and other monthly expenses? To learn exactly how much you need to pay each month, a loan payment calculator—or knowing the monthly payment formula—can help you get the answers you need.

Different Loans, Different Calculations

Before you start calculating payment amounts, you need to know what type of loan you’re using. Different loans require different calculations.

For example, with interest-only loans, you don’t pay down any of the principal in the early years—only interest.Other loans are amortizing loans, where you pay toward both principal and interest over a set period (such as a five-year auto loan).

Here are two quick ways to get the numbers you need:

  • Use a basic loan calculator: For home, auto, and personal loans, which are typically amortizing loans, you can use a Google Sheets calculator to do the math for you.
  • Build a spreadsheet: You can also learn how to build spreadsheets in programs such as Google Sheets or Microsoft Excel. Building your own loan model this way will let you complete calculations and show you how the loan works year-by-year.

If you'd rather do the calculations by hand, that's an option, too.

Monthly Payment Formula

You can calculate your monthly payment if know your interest rate, principal, and length of the loan term. This approach works for many popular loans except credit cards and interest-only loans:

Loan Payment = Amount / Discount Factor, or P = A / D

You need the following values:

  • Number of Periodic Payments (n) = Payments per year times number of years
  • Periodic Interest Rate (r) = Annual rate divided by number of payment periods
  • Discount Factor (D) = {[(1 + r) ^n] - 1} / [r(1 + r)^n]
  • Loan amount (A)

Example: Loan Payment Calculation

Assume you borrow $100,000 at 6% for 30 years, to be repaid monthly. What is the monthly payment? Keep in mind that you'll need to know how to convert percentages to decimal format to calculate these figures.

  • n = 360 (12 monthly payments per year times 30 years)
  • r = .005 (6% rate—expressed as 0.06—divided by 12 monthly payments per year)
  • D = 166.7916 ({[(1+.005)^360] - 1} / [0.005(1+.005)^360])
  • P = A / D, 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

The loan payment calculation for an interest-only loan is easier. Multiply the amount you borrow by the annual interest rate. Then divide by the number of payments per year. Or, multiply the amount you borrow by the monthly interest rate, which is the annual interest rate divided by 12.

Loan Payment = Loan Balance x (annual interest rate/12)

or

Loan Payment = (Loan Balance x Annual Interest Rate)/12

Using the previous loan example, an annual interest rate of .06 divided by 12 is .005. Multiply .005 times the loan amount of $100,000 and you get $500.

You can also find the payment amount by taking the loan amount of $100,000 times the 0.06 annual interest rate, which equals $6,000 per year. Then $6,000 divided by 12 equals $500 monthly payments.

Check your math with the Interest Only Calculator on Google Sheets.

Credit Card Payment Calculations

Credit cards also use fairly simple math, but it may take some legwork to find out your payment amount. Lenders typically use a formula to calculate your minimum monthly payment. For example, your card issuer might require that you pay at least 2% of your outstanding balance each month. They might also have a dollar minimum of $25 (so you pay whichever is greater).

It’s usually wise to pay more than the minimum (ideally, you pay off the entire balance every month), but the minimum is the amount you must pay to avoid late charges and other penalties.

Example: Assume you owe $7,000 on your credit card. Your minimum payment is calculated as 3% of your balance:

  • Payment = MinRequired x Balance
  • Payment = 0.03 x $7,000
  • Payment = $210

Check your math with the Credit Card Payment Calculator on Google Sheets.

But what happens the following month? Your credit card charges interest each month, and you might spend more on your card after you make your payment. Therefore your balance will change, and so will what you owe. In many cases, the same minimum applies: A percentage of your total loan balance is due.

Calculating your card payments will show you how each payment affects your balance.

Interest and Total Loan Cost

Your monthly payment is a critical aspect of your loan. If you don’t have the cash flow for payments, you can’t afford to buy. 

Your monthly payment should not be the only thing you focus on when buying. 

In addition to the payment, it’s crucial to focus on:

  • The purchase price
  • The total amount of interest you pay over the life of your loan
  • Fees you pay to borrow money

Those three components combined make up the total cost of whatever you're buying.

Using Total Loan Cost to Compare

It can be hard to understand exactly how much you'll pay when you have several competing offers. One loan offer might have a lower interest rate; another might have lower fees. Figuring out which offer to choose means you'll need to figure the total cost of the loan including interest and fees. Using the calculators above will help you do an apples-to-apples comparison. For example, some amortization calculators show you lifetime interest. You can use that figure to compare interest costs from loan to loan.

APR

Annual percentage rate (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. And if the APR is low but closing costs and fees are high, and you don't keep your loan for very long (say, refinancing after a few years), you won't be seeing the benefits of that low APR.

Any time you calculate your loan payment and costs, it’s best to consider the results a rough estimate. The actual details might be different depending on which assumptions your lender uses, but your calculations will still give you valuable information.

How to Get the Best Deal

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: How much can you afford each month? With that information, they can sell you almost anything and fit it into your monthly budget.

You would do better to negotiate a lower purchase price rather than a lower monthly payment. Lowering the sales price decreases one of the three components of the total loan cost.

One way to make an expensive car fit lower monthly payments is to stretch the loan over a longer term—seven years instead of the usual four or five. However, 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.

Because you can borrow money from a bank, credit union, or online lender, you don’t need to rely on an auto dealer for financing. Having financing in hand when you go to buy will let you focus on total price instead of monthly payments.

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 Jan. 14, 2020.

  2. Consumer Financial Protection Bureau. "What Is Amortization and How Could It Affect My Auto Loan?" Accessed Jan. 14, 2020.

  3. Federal Reserve Bank of Dallas. "Payment Calculator for Credit Cards and Other Revolving Credit Loans," Accessed Jan. 14, 2020.

  4. Consumer Financial Protection Bureau. "Learn About Loan Costs." Accessed Jan. 14, 2020.

  5. Consumer Financial Protection Bureau. "CFPB Report Finds Sharp Increase In Riskier Longer-Term Auto Loans." Accessed Jan. 14, 2020.

  6. Experian. "Is It Better to Finance a Car Through a Bank or Dealership?" Accessed Jan. 14, 2020.