Guide
How to calculate a loan payment: formula, worked example and the effect of extra payments
Published
For a fixed-rate loan repaid in equal monthly instalments, the payment comes from the loan amount, the interest rate per month and the number of months. You can work it out by hand with one formula, or enter the three numbers into the free loan calculator to get the payment, total interest and a full schedule.
This guide shows the formula, a worked example and what happens when you pay a little extra each month. It explains how the maths works; it is not financial advice, and your lender's figures are the ones that count.
The loan payment formula
For a loan with equal monthly payments and a fixed rate, the payment is:
- Payment = P × r ÷ (1 − (1 + r)^−n)
- P is the amount borrowed.
- r is the monthly interest rate: the annual rate divided by 12 (7% a year is 0.07 ÷ 12).
- n is the number of monthly payments: years × 12.
Worked example: $20,000 at 7% over 5 years
Here P = 20,000, r = 0.07 ÷ 12 and n = 60. The formula gives a monthly payment of $396.02. Over 60 payments that adds up to $23,761.48, so the interest cost is $3,761.48.
In the first month, interest is $20,000 × 0.07 ÷ 12 = $116.67, so $279.35 of the $396.02 reduces the balance and the new balance is $19,720.65. The loan calculator shows the same first row of the schedule.
Why early payments are mostly interest
Interest is charged on the remaining balance. At the start the balance is highest, so most of each payment goes to interest. As the balance falls, the interest part shrinks and more of the same payment goes to principal. That is why the schedule looks lopsided at first.
What an extra monthly payment does
Any extra amount goes straight to principal, which lowers the balance that interest is charged on. In the example above, adding $100 a month (a $496.02 payment) finishes the loan in 47 payments instead of 60, and the total interest falls from $3,761.48 to $2,867.74. That is 13 months sooner and $893.74 less interest.
Enter the same amounts and an extra monthly payment in the loan calculator to see the effect for your own numbers. Check with your lender first that extra payments are allowed and that they are applied to principal, because some loans have conditions or fees.
How rate and term change the payment
Try a few combinations in the calculator before you decide. If you are comparing a home loan, the mortgage calculator starts from price and down payment instead.
- A longer term lowers the monthly payment but increases the total interest paid.
- A higher rate raises both the payment and the total interest.
- A bigger amount scales both up proportionally.
What the calculator does not include
The DailyBox loan calculator assumes a fixed rate, equal monthly payments and monthly compounding. It does not add fees, insurance, taxes or variable-rate changes, and each payment is rounded to the cent, so a lender's figures can differ slightly. Use it to compare scenarios, then confirm the real numbers with your lender.
Questions and answers
How do I calculate a monthly loan payment?
Use Payment = P × r ÷ (1 − (1 + r)^−n), where P is the amount, r the monthly rate (annual rate ÷ 12) and n the number of months. Or enter the values in the loan calculator.
How much interest will I pay in total?
Multiply the monthly payment by the number of payments and subtract the amount borrowed. For $20,000 at 7% over 5 years that is $3,761.48.
Do extra payments really save money?
Yes, if they are applied to principal. In the example above, $100 extra a month saves $893.74 in interest and ends the loan 13 months earlier. Confirm your lender's rules first.
Why is my lender's payment slightly different?
Lenders may include fees, round differently or use a different day-count method. The calculator uses a standard fixed-rate formula with monthly compounding.