The basic formula for monthly loan payments
To find your monthly payment, you need three numbers: the loan amount (called the principal), the annual interest rate, and the number of months you have to repay it. The formula is:
Monthly Payment = P × [r(1 + r)^n] / [(1 + r)^n − 1]
In this formula, P is your principal, r is your monthly interest rate (annual rate divided by 12), and n is the total number of payments. This is the standard amortization formula that banks use for mortgages, car loans, and personal loans.
The reason the formula looks complicated is that it accounts for the fact that as you pay down the loan, you owe less interest each month. Early payments go mostly toward interest; later payments go mostly toward principal. The formula spreads this out mathematically so you pay the same amount every month.
Key Takeaways
- You need three pieces of information to calculate a payment: the loan amount, the annual interest rate, and the loan term in months.
- Convert the annual interest rate to a monthly rate by dividing by 12, then use the amortization formula or a calculator rather than doing it by hand.
- Your early payments are mostly interest; your later payments are mostly principal, even though the total payment stays the same.
- A loan calculator or spreadsheet will show you an amortization schedule, which lists exactly how much principal and interest you pay each month.
- The total interest you pay depends heavily on the loan term—a 15-year loan costs far less in interest than a 30-year loan at the same rate.
Working through a real example
Say you borrow $200,000 at 6% annual interest over 30 years (360 months). Your monthly interest rate is 6% ÷ 12 = 0.005, or 0.5%.
Plugging into the formula:
Monthly Payment = 200,000 × [0.005(1.005)^360] / [(1.005)^360 − 1]
This works out to approximately $1,199 per month. Over 30 years, you will pay about $431,676 total—meaning you paid roughly $231,676 in interest alone. If you shortened the loan to 15 years (180 months), your monthly payment would jump to about $1,687, but you would pay only about $103,660 in total interest. The shorter term costs you more per month but far less overall.
The exact number depends on how your lender rounds and whether they charge fees, so your actual payment may differ slightly from the formula result.
Using a calculator instead of doing the math
Most people do not calculate this by hand. A basic loan calculator—available free on most bank websites, on Google, or in a spreadsheet—will do it instantly. You enter the principal, rate, and term, and it returns your monthly payment.
If you use a spreadsheet like Excel or Google Sheets, the function is PMT. The syntax is =PMT(rate, nper, pv), where rate is your monthly interest rate, nper is the number of payments, and pv is the loan amount (entered as a negative number). For the example above, you would type =PMT(0.005, 360, -200000) and get your monthly payment.
Many loan calculators also show an amortization schedule—a month-by-month breakdown of how much of each payment goes to principal and how much goes to interest. This is useful if you want to see exactly when you will have paid off half the loan or what your balance will be after a certain number of years.
Why interest rates matter so much
A small difference in interest rate creates a large difference in what you pay over time. On a $200,000 loan over 30 years, the difference between 5% and 7% is about $265 per month—that is $95,400 more over the life of the loan.
This is why your credit score and down payment matter. A larger down payment means you borrow less, so you pay less interest overall. A higher credit score usually means a lower interest rate, which saves you thousands of dollars. Before you sign a loan, always ask what rate you are being offered and whether you can improve it by putting down more money upfront.
Some loans also have variable rates, meaning the interest rate changes over time. These are harder to calculate because you do not know what the rate will be in the future. If you have a variable-rate loan, your lender should tell you what the rate is now and what it could be at its highest.
What happens if you pay extra toward principal
If you make a larger payment than required, you can ask your lender to put the extra money toward principal rather than toward your next month's payment. This reduces the total amount you owe and cuts years off the loan.
For example, if your required payment is $1,199 but you pay $1,400, you might ask the lender to apply the extra $201 to principal. This shrinks your balance faster, which means less interest accrues in future months. Over time, this compounds—you pay off the loan sooner and pay far less total interest.
Not all lenders allow this without penalty, and some charge a fee for early repayment. Always check your loan documents or call your lender before sending extra money. If they do allow it, make sure your payment is marked as going to principal, not as a prepayment of future interest.
How to read a loan estimate or disclosure
When you take out a loan, the lender must give you a written estimate showing your monthly payment, the total interest you will pay, and the total amount you will pay over the life of the loan. This document is called a Loan Estimate (for mortgages) or a Truth in Lending disclosure (for other loans).
The monthly payment on this document is the one you calculated using the formula above. The total interest is what you will pay in interest charges if you make only the required payment every month for the full term. The total amount paid is the principal plus all the interest.
These numbers assume you do not pay extra, do not miss a payment, and do not refinance. If you do any of those things, the actual interest you pay will be different. But the disclosure gives you a baseline so you can compare loans from different lenders and decide which one costs you the least.
Frequently Asked Questions
What is the difference between simple interest and compound interest on a loan?
Simple interest is calculated only on the original amount borrowed. Compound interest is calculated on the principal plus any unpaid interest. Most loans use compound interest, which is why the amortization formula is more complex. Credit cards and some personal loans compound daily, which is why they can be expensive if you carry a balance.
Can I calculate my payment if the interest rate changes?
Not with a single formula. If your loan has a fixed rate, it never changes, so you can calculate the payment once and it stays the same. If your loan has a variable rate, the payment will change when the rate changes. Your lender should tell you when and how often the rate adjusts and what the maximum rate could be. You can calculate separate payments for different rate scenarios to see the range.
Why does my actual payment not match the calculator result?
Lenders often round payments to the nearest dollar or add fees that are not part of the basic formula. Some loans also have insurance, taxes, or other costs rolled into the payment. Your loan disclosure will show the exact payment you owe each month. If it differs from the calculator, the difference is usually small and due to rounding or fees.
What if I want to pay off the loan early?
You can pay extra toward principal at any time, which shortens the loan term and reduces total interest. Some lenders charge a prepayment penalty if you pay off the loan before a certain date, so check your loan documents first. Once you know you can pay extra without penalty, contact your lender and ask them to apply the extra payment to principal.
How do I know if a loan is a good deal?
Compare the total amount you will pay (principal plus interest) across different lenders at the same rate and term. A lower rate or shorter term means you pay less total interest. Also check whether the lender charges origination fees, prepayment penalties, or other costs that add to what you owe. The Truth in Lending disclosure is designed to make this comparison easy.