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 a bit of math—can help you get the answers you need.

Calculators are great for getting a quick answer. They also make it easy to do what-if calculations, which help you truly understand your loan and how your decisions affect your finances. For example, you can compare what happens if you borrow slightly less, or what happens when you get a lower interest rate.

Different Loans, Different Calculations

Before you start calculating payments, you need to know what type of loan you’re using. Different loans require different calculations (or calculators). For example, with interest-only loans, you don’t pay down any debt in the early years—you only “service” the loan by paying interest. Other loans are amortizing loans, where you pay down the loan balance 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 most home and auto loans, this Google Sheets calculator handles the math for you, so you don’t have to do any calculations.
  • Build a spreadsheet: You can also build advanced spreadsheets in programs like Google Sheets and Microsoft Excel. Those sheets complete calculations and show you how the loan works year-by-year. See more details about using a spreadsheet for standard amortizing loans (including auto loans, home loans, and many personal loans).

If those don’t give you what you need, don’t worry—we’ll cover several other payment calculations here as well.

Formulas for Amortizing Loan Payment

This approach works for most amortizing loans, which covers 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 (i) = Annual rate divided by number of payment periods
  • Discount Factor (D) = {[(1 + i) ^n] - 1} / [i(1 + i)^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?

  • n = 360 (30 years times 12 monthly payments per year)
  • i = .005 (6% annually expressed as 0.06, divided by 12 monthly payments per year—learn how to convert percentages to decimal format)
  • D = 166.7916 ({[(1+.005)^360] - 1} / [0.005(1+.005)^360])
  • P = A / D = 100,000 / 166.7916 = 599.55

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

Interest-Only Loan Payment Calculation 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. There are other ways to arrive at that same result.

Example (using the same loan as above): $100,000 times 0.06 = $6,000 per year of interest. 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 which numbers to use. 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 a payment. In many cases, the same minimum applies: A percentage of your total loan balance is due.

For more details, see a step-by-step example of calculating your card payments and 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

Big picture: Those three components combined make up the total cost of whatever you're buying. But it’s hard to understand exactly how much you pay when you have several offers from different sources—that’s where the calculations above come in handy. For example, the amortization calculator above adds up the lifetime interest cost of your loan, and shows you how much you spend on interest every month. That cumulative interest cost may be interesting.

APR: Annual percentage rate (APR) is another useful tool for comparing loan costs. On mortgages, APR accounts for up-front costs (closing costs) in addition to the interest rate you pay on your loan balance. As a result, you get closer to an apples-to-apples comparison among lenders. But the lowest APR isn’t always the best loan, and the calculations above can tell you why. As a rule of thumb, high up-front transaction fees might work in your favor if you keep a loan for a long time.

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 (including lenders) can shift things around to make it 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 comfortably afford each month? With that information, they can sell you almost anything and fit it into your monthly budget. But you aren’t necessarily getting a good deal, and the cost of your loan could dramatically increase the total amount you end up paying for your car.

One of the easiest ways to make a loan “affordable” is to stretch out the payments over a longer period: Instead of a four or five-year loan, somebody may propose a seven-year loan with lower monthly payments. Unfortunately, stretching out your loan means you’ll pay more in interest over the life of the loan—effectively paying more for whatever you bought.

You can potentially do better if you negotiate on the purchase price, instead of settling on a monthly payment. That’s because you can borrow money almost anywhere you want: from a bank, credit union, or online lender. You don’t need to rely on an auto dealer for financing. You won’t always get a lower monthly payment this way (so it might not feel like you’re doing better), but you’ll probably spend less overall.

To further minimize your costs, 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.

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 you still get valuable information.

Article Sources

  1. Federal Reserve Bank of Dallas. "Payment Calculator for Credit Cards and Other Revolving Credit Loans," Accessed Oct. 30, 2019.