How loan payments are calculated
Personal loans, student loans, most car loans and fixed-rate mortgages are amortizing installment loans: you pay the same amount every month, and each payment covers that month's interest first, with the rest reducing the balance. The payment is set so the balance reaches exactly zero on the last payment:
Payment = P × r / (1 − (1 + r)−n)
P is the amount borrowed, r is the APR divided by 12 and n is the number of months. For example, $20,000 at 7% for 60 months costs $396.02 a month, and you pay $3,761.44 in interest over the life of the loan.
Term length vs total cost
A longer term lowers the monthly payment but raises the total interest, because you owe money for longer and lenders often charge a higher rate on longer terms too. Try the same loan at 3, 5 and 7 years. A payment that feels comfortable today can cost thousands more over time; a shorter term that still fits your budget is usually the cheaper choice.
APR, fees and what this calculator includes
Enter the loan's APR if you have it. APR includes some lender fees, such as origination fees, spread over the loan, so it gives a fairer comparison between offers than the plain interest rate. If a lender deducts an origination fee from the amount you receive, remember that you repay the full loan amount even though less lands in your account.
Ways to pay less interest
- Improve your credit first. The rate you are offered depends heavily on your credit score and debt-to-income ratio.
- Shop several lenders. Prequalification usually uses a soft credit check and does not affect your score.
- Pay extra when you can. Most personal loans allow early payoff without a penalty; check the loan agreement.
- Avoid stretching the term just to make the payment fit. If it only fits at the longest term, consider borrowing less.
Frequently asked questions
What is the monthly payment on a $20,000 loan?
At 7% APR for 5 years it is $396.02 a month, with $3,761.44 of total interest. At 12% for 5 years it rises to $444.89 a month.
Does this work for student loans?
Yes, for fixed-rate student loans in repayment on a standard plan. Income-driven repayment plans calculate payments differently, based on income.
What happens if the interest rate is 0%?
The payment is simply the loan amount divided by the number of months, and you pay no interest.
Is APR the same as the interest rate?
Not always. The interest rate is the cost of borrowing the principal. APR adds certain fees, so it is usually a little higher and is better for comparing offers.