How to Calculate Loan Payments

The Loan Payment Formula

Monthly loan payments are calculated using the amortization formula:

M = P × [r(1+r)ⁿ] / [(1+r)ⁿ - 1]

Where:

• M = Monthly payment
• P = Principal (loan amount)
• r = Monthly interest rate (annual rate ÷ 12)
• n = Total number of payments (years × 12)

Example Calculation

For a $10,000 loan at 5% annual interest over 3 years:

• P = $10,000
• r = 5% ÷ 12 = 0.4167% per month
• n = 36 months
• M ≈ $299.71/month

How to Reduce Your Loan Cost

1. Make extra payments — Even small additional payments reduce principal and total interest
2. Choose a shorter term — Lower total interest, but higher monthly payments
3. Improve your credit score — Better scores qualify for lower rates
4. Refinance — If rates drop, refinancing can save thousands

Understanding Amortization

In the early months of a loan, most of your payment goes toward interest. Over time, more goes toward principal. This is called amortization — use our loan calculator to see the full breakdown.