How to calculate loan payments and costs


When take out a personal loan, the big question is: how much will it cost each month to pay off the loan? You are of course repaying more than the money you borrowed from the lender; your monthly loan payment also includes interest (or the cost of borrowing money). The amount of each installment also depends on how much time you have to repay the loan.

Loan calculators, which do the math for you, are available for many borrowing scenarios, from student loans to personal loans and home equity loans. However, if you’d rather use the loan repayment formula yourself, here’s how to calculate your monthly payment on all types of loans.

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How personal loan repayments work

In addition to the principal of your loan, you must pay the interest and fees associated with a Personal loan. Here’s what you can expect to pay off when you take out a personal loan:

  • Main: The amount you borrow that is deposited into your account.
  • Interest: What the lender charges you to lend you money. Your annual percentage rate (APR) includes your interest rate and fees that are paid in advance, such as assembly costs. For most personal loans, you have a fixed interest rate, which does not change during the life of the loan. Interest rates are determined by market forces, as well as your credit rating and history – the higher your credit rating, the lower your interest rate.
  • Fresh: Additional costs associated with taking out a loan, such as origination fees, late fees, insufficient funds fees, etc.

Your monthly payment is based on the amount you owe and your repayment term. A loan of $ 5,000 paid over five years will have lower monthly payments than a loan of $ 5,000 paid over three years, since the payments are spread over a longer period. However, keep in mind that your interest rate and any associated fees are also added to each loan payment.

Loan repayment formula

the simple loan repayment formula involves the following variables: the principal amount of your loan, your interest rate and the duration of your loan. The amount of your principal is distributed evenly over the repayment term of your loan, as well as the interest charges and fees owed over the term. Although the number of years of your term may differ, you will generally have 12 payments to make each year.

The type of loan you select will determine the type of loan calculator you will need to use to calculate your payments. There are interest-only loans and amortizable loans, which include principal and interest.

Interest only loans

With interest only loans, you are responsible for paying only the interest on the loan for a specified period. The amount of capital you need to stay the same during this period. The monthly loan costs are quite easy to calculate.

Let’s calculate your costs if you have a loan of $ 20,000 with an APR of 6% and a repayment term of 10 years. In this case, you would take the amount you borrowed and multiply it by your interest rate. This number would represent your annual interest charges, which you would divide by 12 months.

Example of an interest-only payment formula:

$ 20,000 x 0.06 = $ 1,200 interest each year

$ 1,200 divided by 12 months = $ 100 interest per month

Of course, interest-only loans don’t last forever. At the end of the interest-only period of your loan, you will have to repay the principal you borrowed. Typically, interest-only loans turn into amortizing loans that require you to make regular monthly payments on principal and interest after the interest-only period ends.

Amortization of loans

Amortizing loans apply a portion of your payment to your principal balance as well as interest each month.

Auto credit is a type of amortizing loan. Let’s say you took a automatic loan for $ 20,000 with an APR of 6% and a five-year repayment term. Here is how you would calculate the interest payments on a loan.

  1. Divide the interest rate you are charged by the number of payments you will make each year, which should be 12.
  2. Multiply that number by your original loan balance, which should start at the total amount you borrowed.

For the numbers above, the loan repayment formula would look like:

0.06 12 = 0.005

0.005 x $ 20,000 = $ 100

This $ 100 represents the amount of interest you will pay for the first month. However, as you continue to pay off your loan, more of your payment goes to the principal balance and less to interest. You can calculate each month’s interest payment by doing the same calculations as above using your new, lower loan balance.

Pay off an amortizable loan

Month 1 $ 20,000 $ 386.66 $ 286.66 $ 100.00 $ 19,713.34
Month 2 $ 19,713.34 $ 386.66 $ 288.09 $ 98.57 $ 19,425.25
Month 3 $ 19,425.25 $ 386.66 $ 289.53 $ 97.13 $ 19,135.72
Month 4 $ 19,135.72 $ 386.66 $ 290.98 $ 95.68 $ 18,844.75
Month 5 $ 18,844.75 $ 386.66 $ 292.43 $ 94.22 $ 18,552.32
Month 6 $ 18,552.32 $ 386.66 $ 293.89 $ 92.76 $ 18,258.42
Month 7 $ 18,258.42 $ 386.66 $ 295.36 $ 91.29 $ 17,963.06
Month 8 $ 17,963.06 $ 386.66 $ 296.84 $ 89.82 $ 17,666.22
Month 9 $ 17,666.22 $ 386.66 $ 298.32 $ 88.33 $ 17,367.89
Month 10 $ 17,367.89 $ 386.66 $ 299.82 $ 86.84 $ 17,068.07
11th month $ 17,068.07 $ 386.66 $ 301.32 $ 85.34 $ 16,766.76
Month 12 $ 16,766.76 $ 386.66 $ 302.82 $ 83.83 $ 16,463.94

Be pre-qualified

Answer a few questions to find out which personal loans you are prequalified for. The process is quick and easy, and it won’t affect your credit score.

How to calculate monthly loan payments using calculators

Different loans have different requirements. Student loans will not have the same calculations as auto or personal loans. Here is how to use loan calculators depending on the type of loan you have.

Personal loan calculator

A personal loan calculator takes your principal balance, the interest rate and the length of the repayment term and gives you a total monthly payment amount that is due each month.

Most simple personal loans will work with this calculator, but you can also use a more detailed loan repayment calculator if you have specific calculations, such as the impact of additional principal repayments on the term of your loan and the amount of interest you pay.

Student loan calculator

If you are trying to figure out some details about paying off a student loan, you can use a student loan calculator.

When you put in your loan amount and interest rate and try to enter different loan terms, this calculator can help you figure out how much you will need to pay each month to prepay your student loan. You can also see the impact of a one-time additional payment or additional monthly or annual payments on your total loan repayment.

Home equity loan calculator

If you need to take out a home equity loan, you first need to see how much you can borrow with a home equity loan calculator.

You will need to enter your address, your home’s estimated value, your estimated mortgage balance, and your credit score. Even though the equity in your home is a large part of the amount you can borrow through a home equity loan, your credit score will also factor into the loan amount and your interest rate.

Auto loan calculator

Before you decide to take out a car loan from the dealership, you can do your homework with a auto loan calculator first. This calculator will ask you for your desired loan amount, repayment term and interest rate, as well as whether the car you want is new or used. Auto loans can have shorter terms than personal loans or home equity loans, so you can compare the different terms that could affect your monthly payment.

How To Save Money On Interest Payments On Loans

Interest is one of the most important expenses when taking out a loan. The lower your interest rate, the less extra money you’ll pay on top of what you’ve borrowed. While it may not always be possible to lower your interest rate, there are strategies that could help you save money on your loan over time.

  • Get prequalified. If you can see what size loan you qualify for without completing a full loan application – and risk being turned down – you will be able to compare rates many lenders. Once you shop around, you can choose the lender that offers you the lowest interest rate, the least fees, and the best repayment terms.
  • Make additional payments on the principal of your loan. Each month you will have a loan payment. Some of this will go to your principal and some to your interests. Whenever you can, make an additional payment on your principal. This will reduce your total loan balance and the overall interest you owe. The sooner you do this, the better, as interest is charged up front on amortizable loans.
  • Pay off your loan early. If you can afford higher monthly payments or if you can pay off your loan balance in a lump sum, you will pay less interest over the life of the loan. Just make sure there is no prepayment penalty before taking this route.
  • Use an introductory 0% APR credit card. This type of card gives you APR 0% for a fixed period, from 12 to 18 months, depending on the offer of your card. It can help you pay for a large purchase without having to pay huge interest. But if you don’t pay off the card balance before the introductory offer ends, interest payments will start, often at a much higher rate.

The bottom line

Now that you know how to calculate your monthly loan payment, make sure you don’t miss any payments. One way to make sure your loan payments are made on time is to sign up for automatic payment through your lender or bank. You can determine when payments are withdrawn from your bank account; just make sure it’s before your loan maturity date.

If you don’t expect to make a payment for any reason, contact your lender to learn more about your options. Your lender may offer you a temporary deferral or revised payment plan if you are facing financial difficulties, although all lenders are different. Staying in good standing with your loans will help your credit, allow you to get out of debt faster, and help you avoid default.

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