Whether you're getting a mortgage, a car loan, or a personal loan, understanding how your monthly payments are calculated can help you make better financial decisions.
The Loan Payment Formula
Most loans use an amortization formula to calculate equal monthly payments. The formula is:
M = P × [r(1+r)^n] / [(1+r)^n - 1]
Where: M = monthly payment, P = principal (loan amount), r = monthly interest rate (annual rate / 12), n = total number of payments (years × 12).
Example Calculation
Let's say you borrow $200,000 at 6% annual interest for 30 years. The monthly rate is 0.5% and the number of payments is 360.
M = 200,000 × [0.005(1.005)^360] / [(1.005)^360 - 1] ≈ $1,199.10
Over 30 years, you'd pay $431,676 total — meaning $231,676 in interest alone!
Use our free Loan Calculator to see your monthly payments and total interest instantly.
How Interest Affects Total Cost
Even a small change in interest rate can dramatically affect your total cost. For example, on a $200,000 loan over 30 years:
- •At 3%: Monthly payment ≈ $843, Total interest ≈ $103,555
- •At 6%: Monthly payment ≈ $1,199, Total interest ≈ $231,676
- •At 9%: Monthly payment ≈ $1,609, Total interest ≈ $379,244
Tips to Save on Your Loan
- •Shop around for the best interest rate
- •Consider a shorter loan term to reduce total interest
- •Make extra payments when possible to reduce principal faster
- •Improve your credit score before applying
- •Consider refinancing if rates drop