How to calculate loan payments and costs

Before taking on a loan — whether it’s a personal loan, an auto loan or a mortgage — it’s important to know how much the monthly payments will be to determine if your budget can reasonably accommodate the added expense. However, determining the exact installment payments in advance of establishing a new loan can be difficult. That’s when using a loan calculator can come in handy.

How loan payments work

Before you can calculate your payments, you need to know the ins-and-outs of how the payments work. When it comes to loans, these are the four key elements that will determine your monthly bill:

  • Principal: The amount you borrow that gets deposited into your account.
  • Interest rate: expressed as a percentage, the interest rate is the amount lenders charge you for lending you the money. Lenders determine your interest rate based on your credit score and history — the higher it is, the lower your rate will be.
  • Fees: Additional costs of taking out a loan, such as origination fees, late fees, insufficient funds fees and more. The fees you’ll be charged not only vary by lender but also by loan type. For instance, mortgage lenders typically charge closing fees, title search fees and more, which aren’t charged when you take out any other type of loan, such as a student or personal loan.
  • Repayment term: This is the amount of time you have to repay the loan. The longer the repayment period, the less you’ll pay each month, but more interest will accrue over the life of the loan.

How to use a loan payment formula

The simple loan payment formula includes your loan principal amount, your interest rate and your loan term. Your principal amount is spread equally over your loan repayment term and interest charges due over the term. Although the number of years in your term might differ, you’ll typically have 12 payments every year.

The type of loan you have determines the type of loan calculator you need to use to figure out your payments. There are interest-only loans and amortizing loans, which include principal and interest.

Interest-only loans

With interest-only loans, you’re responsible for paying only the interest on the loan for a specified length of time. The amount of principal you owe will stay the same during that period. Because of this, the monthly costs can be pretty easy to calculate.

Of course, interest-only loans don’t last forever. Once the interest-only period of your loan ends, you’ll be required to repay the principal amount you borrowed. Typically, interest-only loans turn into amortizing loans requiring you to make monthly payments on principal and interest after the interest-only period ends.

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Amortizing loans

Amortizing loans apply some of your payment toward your principal balance and interest each month.

Car loans are a type of amortizing loan. Let’s say you took out an auto loan for $20,000 with an APR of 6 percent and a five-year repayment timeline. Here’s how you would calculate loan interest payments.

That $100 is how much you’ll pay in interest in the first month. However, as you continue to pay your loan off, more of your payment goes toward the principal balance and less toward interest. You can figure out each month’s interest payment by doing the same math shown above using your new, lower loan balance.

Starting loan balance Monthly payment Paid toward principal Paid toward interest New loan balance Month 1 $20,000 $387 $287 $100 $19,713 Month 2 $19,713 $387 $288 $99 $19,425 Month 3 $19,425 $387 $290 $97 $19,136 Month 4 $19,136 $387 $291 $96 $18,845 Month 5 $18,845 $387 $292 $94 $18,552 Month 6 $18,552 $387 $294 $93 $18,258 Month 7 $18,258 $387 $295 $91 $17,963 Month 8 $17,963 $387 $297 $90 $17,666 Month 9 $17,666 $387 $298 $88 $17,368 Month 10 $17,368 $387 $300 $87 $17,068 Month 11 $17,068 $387 $301 $85 $16,767 Month 12 $16,767 $387 $303 $84 $16,464

Calculation of loan repayment using a calculator

Each type of loan has different requirements and repayment terms. For example, personal loan payments aren’t calculated the same way that mortgages are. Luckily, you don’t have to crunch these numbers manually — there’s a calculator that can do all the hard work for you.

Personal loan calculator

A personal loan calculator takes your principal balance, interest rate and repayment term length and gives you a monthly payment amount due every month.

Most simple personal loans will work with this calculator. But you can also use a more detailed loan payment calculator if you have specific calculations, such as how making additional principal payments will impact the length of your loan and the amount of interest you pay.

Student loan calculator

If you’re trying to figure out some details about student loan repayment, you can use a student loan calculator.

When you put in your loan amount and interest rate and enter different loan terms, this calculator can help you determine how much you’ll need to pay each month to pay your student loan off early. You can also see how a one-time extra payment or extra monthly or yearly payments would impact your total loan repayment.

Mortgage calculator

A mortgage calculator uses your principal loan amount, your monthly interest rate and the number of monthly payments you’ll make over the loan’s lifetime to determine what the monthly installment payments will be.

Using this type of calculator or crunching the numbers yourself using this formula can help determine how much house you can comfortably afford. Working through these calculations can also help determine whether you need a bigger down payment for your home purchase to help reduce the monthly payment amount.

Home equity line of credit calculator

The exact monthly payment amount for a HELOC will vary based on how much you borrow from your revolving line of credit. But some calculators can tell you how much of a monthly payment you need to make to pay off the debt on a specific timeline.

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Using the calculator requires knowing your HELOC’s current balance, APR, the amount the interest rate changes per year (if at all) and any additional charges or annual fees. Using the information, HELOC payoff calculators can provide a specific repayment timeline to and the amount you would need to pay each month to meet that timeline.

Home equity loan calculator

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

Enter your address, the estimated value of your home, your estimated mortgage balance and your credit score. Even though your available home equity is a major part of how much 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 settle on taking out a car loan at the dealership, you can do your homework with an auto loan calculator first. The calculator will ask for your desired loan amount, repayment term and interest rate and whether you want a new or used car. Auto loans may have shorter terms than personal or home equity loans, so you can compare how different terms affect your monthly payment.

How to calculate total loan costs

Because the total cost of a loan depends on the amount you borrow, how long you take to pay it back and the annual percentage rate (APR), even similarly sized loans may have drastically different total costs.

The APR is the most important factor in calculating total loan cost. It includes the interest rate, plus any fees charged by the lender. In other words, the APR is what you’ll pay for borrowing money. You can use a calculator or the formula for amortizing loans to get the exact difference.

For example, a $20,000 loan with a 48-month term will cost you more than twice as much with a 10 percent APR than a 5 percent APR — the difference between paying $4,350 and $2,100. And since lenders can legally charge up to 36 percent APR, you may be stuck paying a significant amount in interest even if you borrow a small amount for a short time.

5% APR 8% APR 10% APR Monthly payment $460.59 $488.26 $507.25 Total interest paid $2,108.12 $3,436.41 $4,348.08

The length of the repayment term is the second factor you should consider. A longer term means less is paid each month, but more is paid in interest overall.

For example, a $20,000 loan with a 5 percent APR will cost you $1,000 less on interest if you choose to pay it off over 36 months instead of 60 months.

36-month term 48-month term 60-month term Monthly payment $599.42 $460.59 $377.42 Total interest paid $1,579.05 $2,108.12 $2,645.48

Fees will also play a role. If you plan to pay your loan ahead of schedule, see if the lender charges any prepayment penalties or fees for paying off your loan early. In some cases, it may cost less to go with a loan that has a higher APR but no prepayment penalty.

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The same goes for an origination fee. Since it is typically a percentage of the loan amount, you’ll get less of the actual loan with a higher origination fee. And while it is usually deducted from the total loan funds you receive, you will still pay interest on the full loan amount you borrow.

Even still, a loan with a higher origination fee but a lower interest rate may be less expensive. Compare the total cost of each loan using a calculator to determine which is the better financial choice.

How to save money on loan interest payments

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

Get prequalified

Prequalifying for a loan allows you to see the repayment terms and interest rates you qualify for with a specific lender, without impacting your credit. When shopping for any kind of loan, prequalify with at least three lenders, so you can compare offers side by side and choose the most favorable one.

Make extra payments toward your loan principal

Every month you’ll have one loan payment. Some of that will go toward your principal and some will go toward interest.

Whenever you can, make an extra payment toward your principal. Doing so will reduce your total loan balance and the overall interest you owe. The sooner you do this, the better since interest is charged upfront on amortizing loans.

Pay your loan off early

If you can afford higher monthly payments or pay your remaining loan balance back in a lump sum, you’ll pay less in interest over the life of the loan. Make sure there isn’t a prepayment penalty before you go this route.

Use a 0 percent introductory APR credit card

This card gives you 0 percent APR for a set amount of time, anywhere from 12 to 18 months, depending on your card’s offer. Instead of getting a loan, a 0 percent APR card can help you pay off a large purchase without facing huge interest payments. That said, if you don’t pay the card’s balance off by the time the introductory offer is over, interest payments will kick in, often at a much higher rate than most loans.

Borrow only what you need

One of the most straightforward ways to limit the overall interest you pay is to reduce the total amount of money you borrow. The less you borrow, the less interest will be applied to the loan. Crunch the numbers carefully before deciding how much of a loan you want to apply for, and only borrow enough exactly what you need.