How to Calculate Loan Payments
Last updated 2026-09-12
A fixed-rate loan's monthly payment can be calculated directly from the loan amount, interest rate, and term using the standard amortization formula.
Convert the annual rate to a monthly rate
Divide the annual interest rate by 12. A 6% annual rate becomes a 0.5% (0.005) monthly rate.
Apply the amortization formula
Monthly payment = P × [r(1+r)^n] ÷ [(1+r)^n − 1], where P is the loan principal, r is the monthly rate, and n is the total number of monthly payments.
Read the result
This payment stays constant for the life of the loan, but the split between interest and principal shifts over time — early payments are mostly interest, later ones mostly principal.
Example
A $20,000 loan at 6% annual interest over 5 years (60 months): r = 0.005, n = 60. Monthly payment ≈ $386.66.
Important Considerations
- This formula assumes a fixed interest rate — variable-rate loans recalculate the payment (or the term) whenever the rate changes.
- A longer term lowers the monthly payment but increases total interest paid over the life of the loan.
- Extra principal payments reduce the balance faster and cut total interest, but check your loan for prepayment penalties first.
Frequently Asked Questions
- Why is my first payment mostly interest?
- Interest is calculated on the remaining balance each period, which is largest at the start of the loan — as the balance shrinks, more of each fixed payment goes to principal.
- How is a mortgage payment different from a general loan payment?
- The core formula is identical — mortgages just typically add escrow for property tax and insurance on top of the principal-and-interest payment calculated this way.
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