How loan payments are calculated
Fixed-rate loans use the amortization formula. Every month you pay the same amount, but the split changes: early payments are mostly interest, later payments are mostly principal. The monthly payment is:
where P is the loan amount (principal), r is the monthly interest rate (annual rate ÷ 12 ÷ 100), and n is the total number of monthly payments. This is the same formula banks use for personal loans, auto loans, and mortgages, and it's what's known as the EMI (equated monthly installment) in many countries.
Worked example
Borrow $20,000 at 7.5% for 5 years (60 payments). The monthly rate is 7.5 ÷ 12 = 0.625%, so r = 0.00625 and n = 60. Plugging in gives a payment of $400.76 per month. Over the life of the loan you repay $24,045.50 in total, of which $4,045.50 is interest — about 20% on top of what you borrowed.
How to pay less interest
- Shorten the term. The same $20,000 at 7.5% over 3 years costs $2,397 in interest instead of $4,046 — the payment rises, but the total cost drops sharply.
- Shop the rate. Each percentage point off the rate on a 5-year $20,000 loan saves roughly $550 in total interest.
- Make extra principal payments. Most loans allow overpayments; even small ones early in the term cut interest disproportionately because interest accrues on the remaining balance.
This calculator is for estimation and comparison. Your lender's quote may differ slightly due to fees, exact day-count conventions, or compounding rules. It is not financial advice.
Frequently asked questions
What is an amortized loan?
An amortized loan is repaid with equal periodic payments that cover both interest and principal. The schedule is designed so the balance reaches exactly zero at the end of the term. Personal loans, auto loans, and standard mortgages all work this way.
Why is most of my early payment interest?
Interest is charged on the remaining balance, which is largest at the start. On a fresh $20,000 loan at 7.5%, the first month accrues $125 of interest, so of a $400.76 payment only $275.76 reduces the balance. As the balance falls, the interest share of each payment falls with it.
What's the difference between APR and interest rate?
The interest rate is the cost of borrowing the principal. APR (annual percentage rate) additionally folds in mandatory fees such as origination charges, so it's usually slightly higher and is the better number for comparing offers. Enter the plain interest rate here for an accurate payment figure.
Does this work for car loans and student loans?
Yes — any fixed-rate, fully amortizing loan follows the same math, so the calculator works for auto loans, personal loans, and most private student loans. It doesn't model income-driven federal student loan plans or interest-only periods.
How can I pay off my loan faster?
Add extra money toward the principal each month, make one extra payment per year, or refinance to a lower rate. Because interest accrues on the outstanding balance, extra payments made early in the term save the most.