How Loan Payments Are Calculated
For a fixed-rate loan the monthly payment stays constant while its composition changes: at first mostly interest, later mostly principal. This calculator uses the standard amortization formula:
M = P × [ r(1+r)n ] / [ (1+r)n − 1 ]
P is the amount borrowed, r the monthly rate (annual ÷ 12), n the number of payments. At 0 % interest the payment is simply the principal divided by the number of months.
Worked Example
A $20,000 car loan at 5.5 % over 5 years costs about $382 per month. Total repayment is ~$22,920, of which ~$2,920 is interest — about 14.6 % on top of the amount borrowed.
Tips for Cheaper Borrowing
- Shorter terms cost less overall. The same loan over 3 years raises the payment to ~$604 but cuts interest to ~$1,740.
- Compare APR, not the nominal rate. APR folds most fees into a single comparable number.
- Check prepayment terms. Many loans allow free extra payments that directly reduce principal — the earlier, the more you save.