How to calculate a loan payment

Most fixed-rate loans use the same payment formula.

The formula

payment = P × r ÷ (1 − (1 + r)^−n)

P is the amount borrowed, r the monthly interest rate (yearly rate ÷ 12) and n the number of monthly payments.

A worked example

Borrow 10,000 at 6% a year over 3 years. Monthly rate r = 0.005, n = 36.

payment ≈ 10,000 × 0.005 ÷ (1 − 1.005^−36) ≈ 304.22

Total paid ≈ 10,952, so interest ≈ 952.

What drives the cost

• Rate. Even one percentage point changes the total noticeably on long loans.
• Term. Longer loans lower the monthly payment but increase total interest.
• Fees. Origination fees and insurance are not in the formula, so compare the full cost.

Early repayment

Extra payments reduce the balance on which interest is calculated, so overpaying early saves the most. Check whether your loan charges a prepayment fee.