How the Loan Payment Calculator Works
Most home, car and personal loans work the same way. You borrow a sum of money, then repay it in equal monthly payments over a set number of years. Each payment covers the interest for the month, and the rest pays down what you owe. The Loan Payment Calculator finds the size of that monthly payment, and shows how much interest you will pay in total.
What you enter
- Property / loan amount: the price of what you are buying, or the amount you are borrowing.
- Down payment / equity: the money you pay up front, or the value you already own. It is taken off the amount, and the rest is the loan.
- Interest rate: the yearly rate the lender charges.
- Term: how many years you have to repay the loan.
The formula
First the loan amount is worked out, and the yearly rate is divided by 12 to get a monthly rate. Then the standard loan payment formula gives the monthly payment, where P is the loan amount, r is the monthly rate and n is the number of monthly payments:
loan amount = amount - down payment monthly payment = P x r x (1 + r)^n / ((1 + r)^n - 1)
If the rate is 0%, there is no interest, so the payment is simply the loan divided by the number of months. The total interest is the monthly payment times the number of payments, minus the loan amount.
A worked example
You buy a $350,000 home with a $70,000 down payment. The loan is $280,000 at 6.5% for 30 years, which is 360 payments.
| Result | Amount |
|---|---|
| Loan amount | $280,000.00 |
| Down payment | 20% |
| Monthly payment | $1,769.79 |
| Total of 360 payments | $637,124.57 |
| Total interest | $357,124.57 |
The interest is more than the amount you borrowed. In the first month, $1,516.67 of your $1,769.79 payment goes to interest, and only $253.12 reduces the loan. Over time the balance falls, so the interest falls and more of each payment goes to the loan.
Chart: what you still owe
The same loan. The longer the bar, the more you still owe at that point:
Start ████████████████████████████████████████ $280,000 Year 5 █████████████████████████████████████ $262,111 Year 10 ██████████████████████████████████ $237,373 Year 15 █████████████████████████████ $203,166 Year 20 ██████████████████████ $155,863 Year 25 █████████████ $90,452 Year 30 (paid off)
Notice how slowly the balance drops in the first years. After 5 years you have repaid only about $18,000 of the $280,000.
Chart: what the loan costs in total
Interest ████████████████████████████████████████ 56% $357,125 Loan ███████████████████████████████ 44% $280,000
How the term and rate change the payment
On the same $280,000 loan:
| Change | Monthly payment | Total interest |
|---|---|---|
| 6.5% for 30 years (the example) | $1,769.79 | $357,125 |
| 6.5% for 15 years | $2,439.10 | $159,038 |
| 5.5% for 30 years | $1,589.81 | $292,331 |
- Change: 6.5% for 30 years (the example)
Monthly payment: $1,769.79
Total interest: $357,125 - Change: 6.5% for 15 years
Monthly payment: $2,439.10
Total interest: $159,038 - Change: 5.5% for 30 years
Monthly payment: $1,589.81
Total interest: $292,331
A shorter term raises the payment but cuts the interest by more than half. A lower rate lowers both.
Good to know
- The payment covers principal and interest only. Property tax, insurance, mortgage insurance and other fees are extra.
- The calculator assumes a fixed rate and equal monthly payments. Loans with a variable rate will differ.
- The term must be a whole number of months. For example, 2.5 years works, but 2.55 years does not.
- Paying extra each month reduces the balance faster and saves interest, if your lender allows it without a penalty.
This tool gives an estimate for general information only. It is not financial advice. Your lender's figures are the ones that count.