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How To Calculate A Monthly Payment On A Loan

Miranda Crace6-minute read
PUBLISHED: March 20, 2023


Personal loans can be used for a variety of reasons and can come in many shapes and forms, but how can you tell which one would work for your budget? Thankfully, knowing how to calculate the monthly payment on a loan can help you find the best option.

Let’s take a quick dive into calculating a personal loan’s monthly payment, the factors that can affect it and how you can go about lowering yours.

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How To Calculate The Monthly Payment On A Personal Loan

When you use an installment loan, you’ll repay the amount you’ve borrowed (the principal) over a set amount of time (the repayment term). You’ll also have to pay interest and fees, both of which make up the loan’s annual percentage rate (APR).

The principal, loan term and APR are the three main components of your monthly payment. And by knowing each, you’ll be able to calculate how much your installments will be using a loan calculator or a mathematical formula. We’ll explain the math below, but you can also use our Simple Loan Calculator to get an idea of your monthly payment.

Monthly Loan Payment Formula

Depending on the type of personal loan you choose, you can use three formulas to determine the monthly payment. Before you can use a formula, you’ll need to know the loan type and the variables mentioned above. They’ll be represented by the following:

  • P: The loan’s principal or the total amount of money you’ve borrowed
  • r: The loan’s APR or the annual rate (the APR spread over 12 months)
  • n: The number of payments you’ll make over a specific time frame

Interest-Only Loans

An interest-only loan uses a period at the beginning of the term when the borrower only pays interest. After the interest-only period ends, the borrower will pay 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” represents 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 should get $29.17 as your interest-only monthly payment.

Amortizing Loans

Unlike an interest-only loan, an amortizing loan payment goes toward both the interest and principal amount. That means you’ll be paying off the loan in equal monthly installments over the repayment term.

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 (P) is $10,000, the APR is 3.5% and you have a 60-month repayment term (n). With this formula, “r” stands for the annual rate, not the APR. You can use these steps to find the monthly payment:

  1. Divide your APR by 12 months to get your annual interest rate (r). 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. You will then multiply $10,000 by 0.018192 to get your monthly payment, $181.92.

At this point, you can also use a loan calculator to make an amortization schedule for your loan. This extra step can help you visualize how your loan will be repaid over the length of the term. 


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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 costs in the following ways.

Borrow Less Money

Your loan’s principal is the top determining factor lenders use when calculating your monthly payment. Therefore, you can reduce your monthly payment by decreasing 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, you probably won’t be able 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 more installments, making each one smaller. 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 72-month term, you’ll notice a significant difference. The 60-month term loan has a $181.92 monthly payment while a 72-month term loan has a $154.18 monthly payment.

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.

Before you apply for a personal loan, you should check your credit report. 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. 

Find A Lender With Lower Fees

When you get a personal loan, the lender may charge what’s called an origination fee to help cover the administrative costs of creating your loan. However, the exact amount can vary widely 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.

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Personal Loan Monthly Payment FAQs

Learn more about personal loan monthly payments with the answers to these frequently asked questions.

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

Yes, these formulas can be used on other types of loans, as long as you use the correct one. For instance, you can use the amortizing loan equation to calculate the monthly payment for an auto loan, 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 main factors that impact a monthly payment are the loan amount, interest rate, repayment period and 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 perhaps charge you a late fee. If you continue to miss payments, your lender may take more drastic steps. Additional missed payments can cause a loan default, damaging your credit score and creating other financial troubles.

Final Thoughts

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.

If you’re ready to get a personal loan, apply today with Rocket LoansSM to find out what your monthly payment would be. 

Miranda Crace

Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years.