How to Calculate Monthly Loan Payments
The monthly loan payment formula is: M = P × r(1+r)^n / ((1+r)^n − 1), where P is the loan amount, r is the monthly interest rate (annual rate ÷ 12), and n is the total number of payments (years × 12).
Example: $20,000 auto loan at 6% for 5 years: monthly rate = 0.06/12 = 0.005, n = 60 payments → monthly payment = $386.66. Total paid = $23,199. Total interest = $3,199.
Paying extra principal each month dramatically reduces total interest. On the example above, paying an extra $50/month saves $290 in interest and pays off the loan 5 months early. On larger loans and longer terms, the savings are even greater.
Loan Amortization Explained
Each payment is split between interest and principal. Early payments are mostly interest; later payments are mostly principal. This is called amortization. Refinancing or making extra payments attacks the principal directly and reduces future interest charges.
Frequently Asked Questions
What is APR vs interest rate?+
The interest rate is the cost of borrowing the principal. APR (Annual Percentage Rate) includes the interest rate PLUS fees (origination fees, points, etc.). APR is the true cost of the loan and is always higher than or equal to the interest rate. Use APR to compare loans.
How can I pay off my loan faster?+
Make extra principal payments whenever possible. Even rounding up your payment (e.g., paying $400 instead of $387) makes a meaningful difference over the loan term. Most loans allow prepayment without penalty — verify your loan terms.
What is a good interest rate for a personal loan?+
In 2025, personal loan rates range from about 6% for excellent credit (750+) to 36% for poor credit. Auto loans typically range 4–10%. Always shop multiple lenders and compare APRs, not just monthly payments.
What happens if I miss a payment?+
Missing a payment typically results in a late fee, and the missed payment may be reported to credit bureaus after 30 days. This can significantly damage your credit score. Contact your lender immediately if you anticipate trouble — many offer hardship programs.