How loan payments are calculated
Most loans (mortgages, car loans, personal and student loans) are amortizing: you pay the same amount every month, and each payment covers that month's interest first, with the rest reducing the balance. Early payments are mostly interest; later payments are mostly principal.
- M = monthly payment
- P = loan amount
- r = monthly interest rate = APR ÷ 12 ÷ 100
- n = number of monthly payments
Example: a $300,000 mortgage at 6.5% for 30 years costs about $1,896 a month, and about $382,633 in interest over the full term. In India this same calculation is called an EMI; see the EMI calculator.
Why extra payments save so much
Every extra amount you pay goes straight to the principal, so you stop paying interest on it for the rest of the loan. On the $300,000 example above, paying an extra $200 a month saves roughly $103,000 in interest and clears the mortgage about 7 years early. Enter your own numbers in the “Extra payment” box to see your savings.
Before overpaying, check that your loan has no prepayment penalty and that you keep an emergency fund.
15-year vs 30-year loan
A shorter term means a higher monthly payment but far less interest. $300,000 at 6.5%:
| Term | Monthly payment | Total interest |
|---|---|---|
| 15 years | $2,613 | $170,398 |
| 20 years | $2,237 | $236,813 |
| 30 years | $1,896 | $382,633 |
Frequently asked questions
How do I calculate a monthly loan payment?
Use M = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where r is the monthly rate and n the number of months. For $20,000 at 7% over 5 years the payment is about $396 a month.
How much interest will I pay on my loan?
Multiply the monthly payment by the number of payments and subtract the loan amount. The calculator shows this as 'Total interest'.
Is it better to make extra payments on a loan?
Extra payments reduce the principal and the interest charged on it, so they shorten the loan and cut total interest. Check first that there is no prepayment penalty and that you have savings for emergencies.
Does this include property tax and insurance?
No. The payment shown is principal and interest only. For a mortgage, add property tax, home insurance and any mortgage insurance to estimate your full monthly cost.
This calculator is for information only and is not financial advice. Your lender's figures may differ slightly because of rounding, fees and how interest is charged.