How to Calculate a Loan Payment
A loan payment is the regular amount needed to repay borrowed principal plus interest over a defined term. For a fixed-rate amortizing loan, the payment can be calculated from the principal, periodic interest rate, and number of payments. This guide explains the formula, works through a monthly-payment example, and shows how rate and term affect borrowing cost.
Last reviewed: 2026-09-03
Monthly loan payment formula
For a standard fixed-rate amortizing loan with equal monthly payments, use the following formula:
- M = P × [r(1 + r)^n] ÷ [(1 + r)^n − 1]
- M = monthly payment
- P = loan principal
- r = monthly interest rate as a decimal
- n = total number of monthly payments
For a faster estimate, enter these inputs in the Loan Payment Calculator.
Loan payment example
Suppose you borrow $20,000 for five years at a nominal annual interest rate of 6%, with monthly payments. First convert the annual rate and term into monthly inputs.
- Monthly rate = 6% ÷ 12 = 0.5% = 0.005
- Number of payments = 5 × 12 = 60
Now substitute the values into the amortization formula.
- M = 20,000 × [0.005(1.005)^60] ÷ [(1.005)^60 − 1]
- Monthly payment ≈ $386.66
The borrower would make about 60 payments of $386.66, subject to lender rounding and any charges outside principal and interest.
How much interest will you pay in total?
Once you know the payment, multiply it by the number of payments to estimate total scheduled payments. Subtract the original principal to estimate total interest.
- Total payments ≈ $386.66 × 60 = $23,199.60
- Estimated total interest ≈ $23,199.60 − $20,000 = $3,199.60
The exact final amount can differ slightly because lenders may round each installment or calculate interest using contract-specific conventions.
How interest rate changes the payment
With principal and term held constant, a higher interest rate generally raises the required payment and total borrowing cost. Even a modest rate difference can matter over a large balance or long repayment period.
When comparing offers, calculate each loan using the same principal and term rather than comparing rates in isolation.
How loan term changes the payment
Extending the term usually lowers the monthly payment because the balance is spread across more installments. The trade-off is that interest has more time to accrue, so the lower monthly commitment can produce a higher total interest cost.
A shorter term usually does the opposite: higher required payments, but less time for interest to accumulate.
Principal vs interest in each payment
On a typical amortizing loan, the payment may stay constant while its composition changes. Early payments generally contain more interest because the outstanding balance is larger. As principal is repaid, the interest portion declines and more of each payment reduces principal.
What if the interest rate is 0%?
The amortization formula above divides by an expression that becomes zero when the rate is exactly zero. In that case, simply divide principal by the number of payments.
- Payment at 0% interest = Principal ÷ Number of Payments
For example, a $12,000 balance repaid over 24 months at 0% interest would require $500 per month, assuming there are no additional fees.
Loan payment vs compound interest
Loan amortization and compound growth both involve rates and time, but they answer different questions. A loan payment calculation finds the installment needed to reduce a balance to zero. Compound interest calculations usually estimate how a balance grows when returns or interest remain invested.
For growth calculations, use the Compound Interest Calculator and read our compound interest guide.
Costs the basic payment formula may not include
A calculated principal-and-interest payment is not always the full cash cost of borrowing. Depending on the loan, additional costs can include origination fees, closing costs, taxes, insurance, service charges, or optional products. Some fees may be paid upfront; others may be financed and increase the principal.
Always compare the calculator result with the lender's actual repayment schedule and disclosures before making a financial commitment.
Common loan payment calculation mistakes
- Using the annual rate as the monthly rate. Match the interest-rate period to the payment period.
- Forgetting to convert percentages to decimals. A monthly rate of 0.5% is 0.005 in the formula.
- Using years instead of total payments. A five-year monthly loan normally has 60 payment periods, not five.
- Ignoring fees. Principal and interest may be only part of the borrower's actual cost.
- Assuming every loan amortizes the same way. Variable-rate, interest-only, balloon, irregular-payment, and fee-heavy loans can require different calculations.
How to compare loan options
Compare more than the monthly payment. Review the amount borrowed, rate, repayment term, total scheduled interest, fees, and whether the rate can change. A lower payment can improve monthly cash flow while still costing more over the full term.
Use the Loan Payment Calculator to test different rates and terms before comparing offers.