How to Calculate Monthly Loan Payments (Formula Explained)
Learn how to calculate monthly loan and mortgage payments using the amortization formula. Includes examples for car loans, personal loans, and mortgages.
Whether you are taking out a mortgage, car loan, or personal loan, the math behind monthly payments uses the same formula. Understanding it helps you compare loan offers and see how much interest you will actually pay over the life of the loan.
The Loan Payment Formula
M = P × [r(1+r)^n] ÷ [(1+r)^n − 1]
- M = Monthly payment
- P = Principal (loan amount)
- r = Monthly interest rate (annual rate ÷ 12, as a decimal)
- n = Total number of payments (years × 12)
Example: Car Loan
Loan: $25,000 at 6.5% APR for 60 months (5 years)
r = 6.5% ÷ 12 = 0.5417% = 0.005417
n = 60
M = 25,000 × [0.005417 × (1.005417)^60] ÷ [(1.005417)^60 − 1]
M = 25,000 × [0.005417 × 1.3842] ÷ [1.3842 − 1]
M = 25,000 × 0.007499 ÷ 0.3842
M = $489/month
Total paid: $489 × 60 = $29,340. Total interest: $29,340 − $25,000 = $4,340
Example: Mortgage
Loan: $350,000 at 7.0% APR for 30 years (360 months)
r = 7.0% ÷ 12 = 0.5833% = 0.005833
n = 360
M = 350,000 × [0.005833 × (1.005833)^360] ÷ [(1.005833)^360 − 1]
M ≈ $2,329/month
Total paid: $2,329 × 360 = $838,440. Total interest: $838,440 − $350,000 = $488,440 — nearly the loan amount again in interest alone.
How Extra Payments Save You Thousands
On the $350,000 mortgage above, adding just $200/month to your payment:
- Pays off the loan in ~25 years instead of 30 (saves 5 years)
- Saves approximately $80,000+ in interest
This works because extra payments go directly toward principal, which reduces the base on which future interest is calculated — the effect compounds over time.
APR vs. Interest Rate
The interest rate is the base cost of borrowing. The APR (Annual Percentage Rate) includes the interest rate plus fees (origination fees, points, mortgage insurance), expressed as an annual rate. Always compare APR, not just interest rate, when comparing loan offers — a low rate with high fees may cost more than a higher rate with no fees.
Fixed vs. Adjustable-Rate Loans
A fixed-rate loan has the same interest rate for the entire term. Your monthly payment never changes, making budgeting predictable.
An adjustable-rate loan (ARM) has an initial fixed period (e.g., 5 years) then adjusts annually based on a benchmark index. ARMs typically start lower than fixed rates but carry the risk of payment increases. They make sense if you plan to sell before the adjustment period begins.
Try our Loan Calculator to do this calculation instantly — no formulas needed.