How to calculate the monthly payment on a loan

Personal loans can help you accomplish any number of goals, and come in many shapes and forms. But how can you tell if a loan is affordable? Knowing how to calculate a monthly payment will help you do that. It also enables you to compare loan offers and get the best available deal.

How to calculate the monthly payment on a personal loan

When you take out an installment loan, you agree to repay the principal over time with interest. The cost of the loan, including the interest rate and any fees your lender charges, is expressed as the annual percentage rate, or APR.

It’s straightforward to use the principal, APR, and loan term to calculate the monthly installment on a loan using a formula or our Simple Loan Calculator.

Monthly loan payment formula

Depending on the type of personal loan you choose, you can use one of two formulas to calculate the monthly payment.

You’ll need to know the loan type and the key variables:

• P: The loan’s principal or the total amount of money you’ve borrowed
• r: The loan’s APR
• n: The number of payments you’ll make to pay it off

Interest-only loans

An interest-only loan has an introductory period during which the borrower pays interest but no principal. After the interest-only period ends, the borrower pays the principal in installments or as a single lump sum.

Interest-only personal loans are rare, but if you end up using this option, you can calculate the monthly interest payment with this formula:

Monthly Payment = (P × r) ∕ n

Again, P is your principal amount, and r is your APR. However, n in this equation is the number of payments you’ll make over a year.

Now for an example. Let’s say you get an interest-only personal loan for $10,000 with an APR of 3.5% and a 60-month repayment term. You can use the following steps to calculate your interest-only monthly payment:

1. Multiply the principal by the APR. Take $10,000 and multiply it by your APR, 3.5%. You should get $350 as your annual interest amount.
2. Divide your annual interest by the number of payments. Divide $350 by the number of payments you’ll make in a year. For this scenario, you’ll make 12 payments. You get $29.17 as your interest-only monthly payment.

Amortizing loans

When making a payment on an amortized loan, some of your payment goes toward interest, and the rest is applied to the principal. It’s done in a way where you pay off the loan in equal monthly installments.

The formula for calculating the monthly payment on an amortizing personal loan is:

Monthly Payment = P ((r (1+r)ⁿ) ∕ ((1+r)ⁿ−1))

Let’s use the previous example, but this time, the personal loan you get is amortizing. The principal is $10,000, the APR is 3.5% and you have a 60-month repayment term. With this formula, r stands for the annual rate, not the APR.

Use these steps to find the monthly payment:

1. Divide your APR by 12 months to get your annual interest rate. Divide 0.035 by 12 to get 0.002917.
2. Fill out the formula. You can now plug your loan information into the above equation. You should have $10,000((0.002917(1+0.002917)⁶⁰) ∕ ((1+0.002917)⁶⁰−1)).
3. Solve the equations inside the first set of parentheses. You should end up with $10,000((0.002917 × 1.002917⁶⁰) ∕ (1.002917⁶⁰−1).
4. Solve the exponentials. Calculate 1.002917⁶⁰ to get 1.190967. The formula is now $10,000((0.002917 × 1.190967) ∕ (1.190967−1)).
5. Solve the equations in the second set of parentheses. First, multiply 0.002917 by 1.190967 to get 0.003474. Then you can subtract 1 from 1.190967 to get 0.190967 for the other half of the equation. Your formula should look like $10,000(0.003474 ∕ 0.190967).
6. Divide the numbers in the final set of parentheses. Take 0.003474 divided by 0.190967 to get 0.018192.
7. Multiply the loan principal by the total interest rate. You will then multiply $10,000 by 0.018192 to calculate your monthly payment, which is $181.92.

Ways to lower your monthly payment

Calculating a loan’s payment allows you to see how it would fit into your monthly budget. If you know you need to borrow money but want to reduce how much you’ll pay, you can lower your loan cost in the following ways to make your loan more affordable.

Borrow less money

Your loan’s principal is the one thing that most affects your monthly payment. One of the easiest ways to reduce your monthly payment is to decrease the amount of money you borrow.

Of course, this trick won’t work for everyone. For instance, if you need to borrow $1,000 to fix your car, it won’t work to borrow less. However, if you think you can get away with a smaller loan amount, it can help you reduce your monthly payment and the amount of interest you’ll pay over the loan’s lifespan.

Use a longer term

The more time you have to pay back the money you owe, the smaller your monthly payment. That’s because the repayment will be broken down into smaller installments. You can use the above formulas or a loan calculator to compare different repayment terms.

For instance, if you compare the 60-month repayment term of the previous example to a 36-month term, you’ll notice a significant difference. The 36-month term loan has a monthly payment of $293.02, while the 60-month term loan has a monthly payment of $181.92. However, it’s important to note that interest rates may be higher on loans with longer terms.

Secure a lower interest rate

Another way to lower your monthly payment is to reduce the amount of interest you’ll have to pay. Since personal loans have strict approval requirements, you can increase your chances of getting a lower interest rate by improving your credit score. Although lenders may have different credit score requirements for personal loans, high scores correlate with better rates.

Before applying for a personal loan, it's essential to check your credit report. Remember that everyone is entitled to one free weekly credit report from each of the major credit bureaus. Look for any errors, incorrect information, or outstanding accounts. If you find any of these entries on your report, you can file a dispute or pay off your debts to help boost your credit score. 

Another way to potentially secure a lower interest rate is to shop around for loans and get prequalified with multiple lenders. Prequalification results in a soft pull on credit, which won’t impact your credit score. Getting prequalified with multiple lenders can help you find the lowest interest rate and save money.

Find a lender with lower fees

When you get a personal loan, the lender may charge an origination fee to help cover the administrative costs of creating your loan. The exact amount varies from one lender to another. Most fees are typically 1% – 10% of the loan amount.

To help keep your monthly payments low, you can compare lenders based on the fees they charge. You can do this using the APR, because it includes both the interest rate and additional fees. Getting prequalified with multiple lenders can help you compare interest rates, fees, and loan terms to find the best loan for you.

FAQ

Here are answers to common questions about calculating the monthly payment on a loan.

Can I use the monthly payment formula for other types of loans?

Yes, these formulas can be applied to other types of loans, as long as the correct one is used. For instance, you can use the amortizing loan equation to calculate the monthly payment for an auto loan, private student loan, home equity loan, or fixed-rate mortgage. Or, you can use the interest-only formula to calculate the monthly payment for a balloon loan or interest-only mortgage.

What factors affect my monthly payment?

The primary factors that influence a monthly payment are the loan amount, interest rate, repayment period, and associated fees. By adjusting any of these four factors, you can change your monthly payment. For example, if you made a down payment on a car loan, you’d have a lower loan amount and reduce your monthly payment.

How can I calculate the total cost of a loan?

You can estimate the total cost of using a loan by multiplying the monthly payment amount by the number of payments you’ll make over the term. Using the amortizing example above, if you have a monthly payment of $181.92 for 60 months, the total cost would be $10,915.

What happens if I miss a loan payment?

If you forget to make a monthly payment on your loan, your lender may notify you and charge a late fee. If you continue to miss payments, your lender may take more drastic steps. Additional missed payments can lead to a loan default, damaging your credit score and potentially creating other financial difficulties.

The bottom line: Calculating your loan payment prepares you financially

While knowing how to calculate a monthly payment on a loan isn’t required to borrow money, understanding the steps involved in the process can make you a more informed consumer. And recognizing the factors that determine a monthly payment can also make it easier to find the right loan for your needs and budget.