How to Calculate Loan Payments (Monthly Payment Formula)
4 min read
Any fixed-rate loan - a car loan, personal loan, or student loan - uses the same math to turn an amount, a rate, and a term into a fixed monthly payment. Once you know it, you can compare offers in seconds.
Here is how to calculate loan payments by hand and with a free calculator.
Step by step
- 1Gather the three inputs
You need the loan amount (principal), the annual interest rate, and the term in months or years.
- 2Find the monthly rate and number of payments
Divide the annual rate by 12 for the monthly rate, and use the total number of monthly payments. A 10,000 loan at 9% for 3 years is r = 0.0075 and n = 36.
- 3Apply the payment formula
Payment = P x r x (1 + r)^n / ((1 + r)^n - 1). For the example above that is about 318 per month, totaling roughly 1,452 in interest over the life of the loan.
- 4Compare with the calculator
Drop your figures into the Loan Calculator to see the payment and total interest, and to compare different rates or terms side by side.
Tips
- A longer term lowers the monthly payment but raises the total interest you pay - always check both numbers.
- Even a 1% lower rate can save hundreds or thousands over the loan, so it pays to shop around.
- Paying a little extra each month goes straight to principal and can shorten the loan significantly.
Frequently asked questions
What is the monthly loan payment formula?
Payment = P x r x (1 + r)^n / ((1 + r)^n - 1), where P is the principal, r is the monthly interest rate, and n is the number of monthly payments.
Does a longer term mean a cheaper loan?
No - it lowers the monthly payment but increases the total interest, so a longer loan usually costs more overall.
Can I use this for a car or personal loan?
Yes. The same formula works for any fixed-rate, fixed-term installment loan - car, personal, or student.